Price Stability Flashcards

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Note: We may include questions that have multiple correct answers. It's useful to remember specific examples to understand these concepts better.

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What does price stability mean?

When inflation is low and steady, so the value of money changes little.

What is inflation?

A lasting rise in the average prices of goods and services.

What is deflation?

A lasting fall in the average price level across the economy.

Which index is used to measure inflation in the UK?

The Consumer Prices Index (CPI).

How is CPI worked out?

The Office for National Statistics (ONS) tracks a basket of goods and services and gives each item a weight. It compares current prices with a base year to make an index.

What is the UK inflation target?

2% a year on the CPI, set by the government.

Who sets interest rates to meet the inflation target?

The Bank of England’s Monetary Policy Committee (MPC).

How can higher interest rates help to lower inflation?

They make borrowing more costly and saving more rewarding, so spending falls. Lower demand slows price rises.

Name two main causes of inflation.

Demand-pull (too much spending) and cost-push (higher production costs).

What is one effect of high inflation on households?

Money buys less, so living costs rise. Savers may lose if interest on savings is below inflation.

How is inflation different from a one-off price rise?

Inflation is a lasting rise in average prices across the economy. A one-off rise is a single price change that does not last or spread.

How do you find the inflation rate using CPI figures?

Use ((CPI this year – CPI last year) / CPI last year) x 100. For example, from 110 to 115 is about 4.5%.