Karthikeyan

Meaning and Measurement

Inflation

• Inflation means a rise in the general price level of goods and services in an economy.

• It means money loses value — you can buy less with the same amount.

• Example: If prices rise by 5%, what cost ₹100 before will cost ₹105 now.

Deflation

• Deflation means a fall in the general price level of goods and services.

• It means money gains value — you can buy more with the same amount.

Disinflation

• Prices are still rising, but at a slower rate.Example: Inflation falls from 8% to 4%.

How Inflation Is Measured (IGCSE method)

• The government makes a “basket of goods” that people usually buy (like food, clothes, fuel).

• They record the prices of these items every month.

• They compare the prices with the prices in a base year (set as 100).

• This gives the Consumer Price Index (CPI).

If CPI goes up, there is inflation.

 If CPI goes down, there is deflation.

Causes

Causes of Inflation

1. Demand-Pull Inflation

   • When demand is higher than supply.

   • Example: People have more money → buy more → shops increase prices.

   • Happens when:

     • Wages rise

     • Taxes fall

     • Government spends more

     • Low interest rates → more borrowing

2. Cost-Push Inflation

   • When cost of making goods increases.

   • Firms raise prices to cover costs.

   • Happens when:

     • Wages increase

     • Price of raw materials goes up

     • Import prices rise

     • Higher taxes on goods

Causes of Deflation

1. Fall in Demand

   • People spend less → firms reduce prices.

   • Happens during recession, high unemployment, or high interest rates.

2. Increase in Supply

   • Firms make more goods cheaply (new tech, more efficiency).

   • Prices fall because it’s cheaper to produce.

 How to Control Them

How to Reduce Inflation

1. Monetary Policy

   • Increase interest rates → people borrow less, spend less.

   • Reduce money supply.

2. Fiscal Policy

   • Reduce government spending.

   • Increase taxes to lower demand.

3. Supply-Side Policies

   • Make workers more productive.

   • Reduce cost of production (training, technology).

How to Control Deflation

1. Lower interest rates → cheaper loans → more spending.

2. Increase government spending → create jobs.

3. Cut taxes → people have more money to spend.

4. Encourage investment → boost demand.