Measure inflation and compare its causes
Use the Consumer Prices Index to explain inflation and assess effects on households, firms and policy.
Section 4.7 · Inflation
Cambridge IGCSE Economics 0455 / IGCSE (9–1) Economics 0987, 2027–2029 Version 1. Apply each model to the stated evidence and qualify conclusions where effects depend on context. Practice is original and self-checked; it is not a Cambridge paper, mark scheme or official grade.
Before you begin
- No prior economics study is assumed. Read the scenario for the decision-maker, the market or economy involved, the time period and the evidence supplied.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is a cause of cost-push inflation?
What you will learn
- Define inflation and deflation
- Explain CPI measurement
- Analyse causes, consequences and control policies
Inflation is a sustained rise in the general price level
Inflation means the general price level rises over time; deflation is a fall in that level. A lower positive inflation rate means prices are still rising more slowly, which is disinflation.
The Consumer Prices Index tracks prices of a weighted basket. The basket represents average spending patterns, so individual households may experience different changes.
Demand-pull and cost-push have different starting points
Demand-pull inflation can occur when total demand grows faster than productive capacity. Cost-push inflation can follow rising production costs, such as imported inputs or wages not matched by productivity.
Inflation can affect savers, lenders, borrowers, consumers, workers and firms differently. If inflation is higher than expected, savers and lenders may lose real purchasing power on fixed nominal returns. Borrowers with fixed-rate debt may repay in money with lower real value, though the effect depends on income changes and loan terms. Policies to control inflation include fiscal, monetary and supply-side measures; each works through different channels and can affect output or employment.
Pause and explain
Why might a fixed-income saver lose purchasing power during inflation?
Worked example
The CPI rises from 150 to 156. Calculate the percentage rise in the index.
Show the worked solution
- Change = 156 − 150 = 6.
- Divide by the starting index: 6 ÷ 150 = 0.04.
- Convert to 4%.
Answer The CPI has risen by 4% over the measured period. This is the index change, not a claim that every household's costs rose by exactly 4%.
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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.
CPI rises from 180 to 189. Calculate the percentage change and state one limitation of interpreting it for a household.
Give me a hint
Divide the index change by the original index.
Compare my reasoning
- Change = 9.
- 9 ÷ 180 = 0.05.
- A household's basket may differ from the average basket.
The CPI rises by 5%. A household with a different spending pattern may face a different cost change.
Look for these in your work
- Change found
- Rate calculated
- Limitation stated
Demand rises rapidly while firms are near capacity. Explain a demand-pull inflation path and one possible policy response.
Give me a hint
Trace spending through capacity and prices.
Compare my reasoning
- Higher demand increases orders.
- If firms cannot expand output quickly, prices may rise.
- Tighter monetary or fiscal policy may restrain demand, with output trade-offs.
Demand growth can outpace capacity and put upward pressure on prices. Higher interest rates or lower public spending may restrain demand, but can also slow output and employment.
Look for these in your work
- Demand mechanism explained
- Capacity condition included
- Policy trade-off noted
A firm faces higher energy costs and raises prices. Explain how this may affect workers and customers, and why a price rise is not the only possible response.
Give me a hint
Consider real wages, demand and firm cost adjustment.
Compare my reasoning
- Higher prices reduce purchasing power if nominal incomes do not keep pace.
- Workers may seek higher wages; customers may reduce purchases.
- The firm may also improve efficiency, absorb some cost or change suppliers.
Workers and customers may face lower real purchasing power if incomes lag. The firm might pass on costs, absorb some through profit, improve efficiency or change inputs; each response has limits.
Look for these in your work
- Household effect explained
- Worker/customer response included
- Alternative firm responses identified
Common mistakes
- Calling slower inflation a fall in prices
- Treating CPI as identical to every household's cost of living
- Assuming one policy removes inflation without affecting other aims
What can you explain now?
How is inflation measured in this syllabus?
Compare with the explanation
Using the Consumer Prices Index
CPI tracks a weighted basket of prices.
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Make it stick
How is inflation measured in this syllabus?
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