Inflation, deflation and the CPI
Inflation is a sustained rise in the general (average) price level; deflation is a sustained fall — not a one-off price rise in one good. Disinflation is a fall in the rate of inflation (prices still rise, 6% → 3%), NOT deflation. Both are measured by the CPI (consumer prices index): a weighted "basket" of goods a typical household buys, base year = 100. The inflation rate is the % change in the CPI between periods.
Causes of inflation and deflation
Inflation has two causes. Demand-pull: total demand rises faster than supply, so firms raise prices — from lower interest rates/taxes, higher government spending or exports, near full employment. Cost-push: production costs rise (wages, energy, a lower exchange rate), so firms raise prices, and a wage-price spiral can follow. Deflation is demand-side (bad: falling demand) or supply-side (good: lower costs/productivity).
Consequences and control policies
Inflation erodes real incomes, wages and savings but cuts the real value of debt (helping borrowers, harming savers/lenders); at the extreme, hyperinflation is severely damaging. Deflation brings cheaper goods but delayed spending, a rising real debt burden and a possible deflationary spiral. Control inflation with contractionary monetary/fiscal policy (supply-side eases cost-push); reverse it to fight deflation.
Drawn from real examiner reports.
Name the type — not just 'inflation'
When a question asks how a change affects inflation, name the mechanism: demand-pull (total demand rising) or cost-push (production costs rising). Writing only "this causes inflation" earns little. Do NOT invent types — "cost-pull", "frictional" or "contractional" inflation are wrong here. Rising energy prices = cost-push.
November 2024 Paper 2: where an extract described rising energy prices pushing up costs, weaker answers stated "demand-pull" or invented terms such as "cost-pull", "frictional" and "contractional" inflation, or simply quoted the stated inflation rate. Candidates needed to specify the type.
Link effects back to the cause
In higher-mark parts, stating effects with no chain and no reference to the cause is too thin. The cause changes the effect: cost-push squeezes firms' margins and can cut output, whereas demand-pull often accompanies a buoyant economy. Always connect the effect back to its cause.
June 2022 Paper 2 (d): many candidates just listed points (e.g. inflation reducing demand for products) without considering what caused the inflation; the strongest answers contrasted how demand-pull and cost-push inflation affect producers.
Macro question answered as micro
Inflation is the average of all prices across the whole economy — a macroeconomic idea. A common slip is answering as if it were microeconomic, discussing only the demand for a single good. Keep the analysis at the whole-economy (general price) level, not one product; and do not confuse income taxes with taxes on goods when explaining rising prices.
June 2022 Paper 2: some candidates answered a macroeconomic question microeconomically, writing only about the demand for a single good; some also confused income taxes with taxes on goods when explaining rising prices.
Stable prices: benefits, not a definition
Asked why stable prices (low inflation) are beneficial, candidates often describe what stability is — "prices stay the same" — instead of giving benefits: affordability, confidence to spend and invest, competitive exports, and attracting multinational companies (MNCs). The command word wants reasons, not a definition.
June 2024 Paper 2 (c): many candidates could not explain why stable prices are better than inflation or deflation; a weak answer ("if price is stable, it remains unchanged") described stability but gave no benefits.
Deflation ≠ disinflation
Deflation is the general price level actually falling (a negative inflation rate). Disinflation is the inflation rate falling while prices still rise — e.g. inflation dropping from 6% to 3% is disinflation, not deflation. Make clear deflation means a negative rate, not merely slower inflation.
Explain deflation's drawbacks
Most candidates can define deflation, but marks are won by explaining its drawbacks: uncertainty about future prices, consumers delaying purchases, and firms cutting output and jobs as revenue falls. Do not stop at "prices fall" — develop why that harms the economy, up to a self-reinforcing deflationary spiral.
November 2023 Paper 2 (h): most candidates understood what deflation means; the strongest were better at explaining the drawbacks, such as uncertainty about prices and firms cutting output.
The Paper 2 (a)–(d) ladder
The command word sets the answer's shape as the ladder steps up: (a) define (2) — precise meaning; (b) explain (4) — a short why-chain; (c) analyse (6) — a cause-and-effect chain; (d) discuss (8) — both sides plus a judgement.
Analyse = chain, don't evaluate yet
In the (c) analyse part, build a sustained chain of cause and effect and name the type of inflation — but do NOT weigh two sides; evaluation earns nothing here. Save judgement for (d) discuss, the only part carrying AO3 (evaluation) marks.
Make the (d) judgement conditional
In (d) discuss, give both sides and a supported judgement that is conditional — e.g. whether a policy works "depends on" the cause of inflation, spare capacity, or how the economy compares with rivals. Always link an effect back to its cause.
Keep the analysis macroeconomic
Plan the (d) part first, then keep every argument at the whole-economy level — the general (average) price level — not the demand for one good. A microeconomic answer about a single product does not address inflation.
The word general is key: inflation is about the average of all prices, not a one-off rise in one good. Inflation is a macroeconomic idea.
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