Price stability
Price stability: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
Section 4.6 · Price stability
9708 section 4.6; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What distinguishes disinflation from deflation?
What you will learn
- Distinguish inflation, deflation and disinflation
- Explain CPI measurement and limitations
- Distinguish nominal and real values
- Analyse cost-push and demand-pull inflation
- Evaluate consequences of changing prices
Core model and terms
Inflation is a sustained rise in the general price level; deflation is a fall in that level; disinflation is a slower positive rate of inflation. A consumer price index tracks a weighted basket, but household spending patterns, quality changes, substitutions and sampling can make the index differ from a particular family’s experience.
Apply and evaluate
Nominal values use current money prices; real values adjust for price changes. Demand-pull inflation arises when aggregate demand rises relative to capacity; cost-push inflation can follow higher input costs. Inflation’s effects on borrowers, savers, workers, firms and trade depend on its rate, predictability, contracts and whether incomes adjust.
Pause and explain
Which statement best applies price stability?
Worked example
A monthly wage rises from $2,000 to $2,080 while the price index rises by 6%. Approximate the change in real wages.
Show the worked solution
- Nominal wage growth = 80 ÷ 2000 × 100 = 4%
- Prices rose 6%
- Approximate real wage growth is −2%
Answer Nominal wage growth = 80 ÷ 2000 × 100 = 4% → Prices rose 6% → Approximate real wage growth is −2%
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A monthly wage rises from $2,000 to $2,080 while the price index rises by 6%. Approximate the change in real wages.
Give me a hint
Calculate nominal wage growth, then subtract inflation for an approximation.
Compare my reasoning
- Nominal wage growth = 80 ÷ 2000 × 100 = 4%
- Prices rose 6%
- Approximate real wage growth is −2%
Nominal wage growth = 80 ÷ 2000 × 100 = 4% Prices rose 6% Approximate real wage growth is −2%
Look for these in your work
- Nominal wage growth = 80 ÷ 2000 × 100 = 4%
- Prices rose 6%
- Approximate real wage growth is −2%
The inflation rate falls from 8% to 3%, but the price level is still rising. Name the change.
Give me a hint
Check whether the price level falls or merely rises more slowly.
Compare my reasoning
- Inflation remains positive
- The general price level continues to rise
- The slower rate is disinflation, not deflation
Inflation remains positive The general price level continues to rise The slower rate is disinflation, not deflation
Look for these in your work
- Inflation remains positive
- The general price level continues to rise
- The slower rate is disinflation, not deflation
An oil-price shock raises firms’ costs. Explain the likely inflation mechanism and one possible output effect.
Give me a hint
Start with production costs, then trace the supply curve.
Compare my reasoning
- Energy is an input cost
- Higher costs can shift SRAS left
- The price level may rise while real output falls
Energy is an input cost Higher costs can shift SRAS left The price level may rise while real output falls
Look for these in your work
- Energy is an input cost
- Higher costs can shift SRAS left
- The price level may rise while real output falls
Why can one national CPI rate fail to describe every household’s cost-of-living change?
Give me a hint
Compare the representative basket with different household budgets.
Compare my reasoning
- Households buy different combinations of goods
- Their weights and suppliers differ from the CPI basket
- Their personal inflation rates can be higher or lower
Households buy different combinations of goods Their weights and suppliers differ from the CPI basket Their personal inflation rates can be higher or lower
Look for these in your work
- Households buy different combinations of goods
- Their weights and suppliers differ from the CPI basket
- Their personal inflation rates can be higher or lower
Common mistakes
- Confusing a falling inflation rate with falling prices, or assuming a CPI basket matches every household’s spending.
What can you explain now?
What distinguishes disinflation from deflation?
Compare with the explanation
Disinflation is slower positive inflation; deflation is a falling general price level
The price level still rises during disinflation but falls during deflation.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
Before moving on, explain the central idea in price stability and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.