3.3.4—Low and stable inflation
- Syllabus
- First assessment 2022
- Objective
- 3.3.4
- Level
- SL
Stable inflation is a predictable rise in the average price level
Inflation is a sustained rise in the average price level; a low, stable rate makes contracts and purchasing decisions easier to plan.
A CPI tracks a weighted basket. Demand-pull inflation begins with spending pressure, while cost-push inflation begins with higher production costs; both can change purchasing power and distribution.
If the CPI rises from 120 to 123, inflation is (3 ÷ 120) × 100 = 2.5%. An energy-price shock can raise costs and inflation while output falls, unlike a pure demand expansion.
State whether the evidence shows a rate, a cause or a distributional effect; then distinguish demand-pull from cost-push before evaluating policy.
Low inflation is not falling prices. A fall in the inflation rate is disinflation; deflation means the general price level itself falls.
CPI may misstate a household's experience because baskets and weights become outdated, consumers substitute between goods, quality and new products are hard to capture, and spending patterns differ. High inflation creates uncertainty, arbitrary redistribution between borrowers and lenders or fixed-income groups, distorted saving, weaker export competitiveness, slower growth and inefficient resource allocation. In AD/AS, demand-pull inflation follows a rightward AD shift; cost-push inflation follows a leftward SRAS shift and can reduce real output.