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Inflation refers to the rate of increase in the general price level for goods and services within an economy. It is commonly expressed as the annual percentage change in prices.

Inflation

After a prolonged period of nearly 40 years where high-income nations experienced only minimal annual price increases, leading some to believe high inflation was no longer a threat, a significant and widespread surge in global inflation began.

Global Resurgence of Inflation After a Long Period of Stability

Figure 4.1 presents a dataset of the UK's annual inflation rate from 1875 to 2022. This historical data reveals distinct economic periods, including significant deflation (falling prices) during the interwar years, periods of disinflation (slowing inflation) in the mid-1980s and mid-1990s, and a long phase of relatively stable, low inflation from the early 1990s until 2022.

UK Inflation Rate (1875–2022) [Figure 4.1]

While the public generally dislikes high and volatile inflation, there is little objection to a low and predictable rate of price increases, especially if it does not negatively impact real purchasing power.

Public Acceptance of Low, Predictable Inflation

A small economy reports the following annual changes in its general price level:

*   **Year 1:** +8%
*   **Year 2:** +3%
*   **Year 3:** -1%

Analyze this data to describe what happened to the rate of price change between Year 1 and Year 2, and what happened to the overall price level in Year 3.

Analyzing Price Level Changes in an Economy

The table below shows the annual percentage change in the general price level for a hypothetical economy.

| Year | Price Level Change |
|------|--------------------|
| 1    | +3.0%              |
| 2    | +5.0%              |
| 3    | +2.0%              |
| 4    | -1.0%              |

Based on this data, which year experienced disinflation (a slowing in the rate of price increases)?

An economy reports the following annual rates of change in its general price level: Year 1: +4%, Year 2: +2%, Year 3: -1%. Describe the economic phenomenon that occurred between Year 1 and Year 2. Then, identify and describe the phenomenon that occurred in Year 3.

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