Glossary

Inflation

Inflation is when prices across the economy keep rising, so the same $10 buys a little less each year. The coffee that was$ 3 last year is $3.30 now, your streaming subscription crept up, the bus fare ticked higher. None of those on its own is inflation — inflation is the broad, ongoing drift upward in prices that quietly erodes what your money can buy.

More precisely, inflation is a sustained increase in the general price level of goods and services, measured as the percentage change in a price index — usually the Consumer Price Index — over a period such as a year. The emphasis on sustained matters: a one-time jump in the price of gas is a relative price change, not inflation. Two related terms often trip students up: deflation is a negative inflation rate (the price level actually falls), while disinflation is inflation slowing down while still positive (prices rise, but more slowly). Economists also separate demand-pull inflation (too much spending chasing too few goods) from cost-push inflation (rising production costs).

\pi = \frac{P_t - P_{t-1}}{P_{t-1}} \times 100

Inflation rate

The inflation rate

\pi

is the percentage change in a price index

P

from one period to the next, where

P_t

is this period's index value and

P_{t-1}

is last period's. When

P

is the CPI, this gives the headline inflation figure reported in the news.

Deflation: A negative inflation rate — the general price level falls, so $\pi < 0$ . Often a symptom of weak demand, and harder for policymakers to fight than mild inflation.
Disinflation: A fall in the inflation rate while it remains positive. Prices still rise, just more slowly — for example, inflation easing from 6% to 3%.
Consumer Price Index: The price index of a fixed basket of consumer goods, and the most common gauge of inflation. See CPI.
Real versus nominal: Nominal values are measured in current dollars; real values are adjusted for inflation. This is why real GDP is preferred for comparing output over time.