Inflation: a sustained rise in the average (general) price level in an economy over time. Not one price: prices on average.
Rate of inflation: how fast the average price level is rising, given as a percentage over a year. An inflation rate of 3% means that, on average, prices are 3% higher than a year earlier.
Purchasing power: inflation means each pound buys less than before.
Deflation: the average price level falls, so the inflation rate is negative.
Falling inflation is not falling prices. If inflation falls from 6% to 2%, prices are still rising, only more slowly.
Money (nominal) v real: a real figure has been adjusted for inflation. If your pay rises 3% but prices rise 5%, your real income falls.
Exam tipExaminers reject definitions about the price of one good. Always say the average or general price level.
Watch outAQA's vocabulary list calls inflation a ‘natural tendency’ for prices to rise. Don't copy that: say a sustained rise in the average price level.
Inflation
A sustained rise in the average price level in an economy.
Rate of inflation
The percentage increase in the average price level over a year.
Deflation
A fall in the average price level: a negative inflation rate.
Real income
Income adjusted for inflation: what your income will actually buy.
3.2.2.4 Measures of inflation
Measuring inflation: the Consumer Prices Index
Consumer Prices Index (CPI): the UK's main measure of inflation, and the one the government's target uses.
The basket of goods: each month the Office for National Statistics (ONS) records the prices of hundreds of goods and services that households typically buy, such as food, fuel, clothes, rent, transport and holidays.
Weights: items people spend more on count for more. A 10% rise in energy prices moves the CPI far more than a 10% rise in the price of salt.
Index number: the weighted average price level is shown as an index, with a base year = 100. An index of 112 means prices are on average 12% higher than in the base year.
The basket changes as spending habits change: new items (such as streaming subscriptions) come in and old ones drop out.
Other measures exist, such as CPIH (CPI plus some housing costs) and the older RPI. For AQA, learn the CPI.
How the CPI turns hundreds of prices into one inflation rate
Worked exampleIn the base year a basket of goods cost £80. A year later the same basket cost £86. What is the price index for the second year?
Index = cost this year ÷ cost in the base year × 100
= £86 ÷ £80 × 100
107.5 (prices are on average 7.5% higher than in the base year)
Exam tip‘Weighted’ is the key word. The CPI is an average, so some prices rise faster, some slower, and some fall.
Consumer Prices Index (CPI)
A weighted average of the prices of a basket of goods and services, used to measure inflation.
Basket of goods
The set of goods and services whose prices are tracked to measure inflation.
Weights
How much each item counts in the index, based on how much households spend on it.
Base year
The year an index is set to 100, so later years can be compared with it.
3.2.2.4 Simple calculations using CPI figures
Calculating inflation from CPI figures
Inflation rate = (CPI this year − CPI last year) ÷ CPI last year × 100.
Always divide by the earlier (original) value.
Never average the index numbers to find inflation. The rate is the change in the index.
Round as the question says (often to 1 decimal place). The % sign is not needed for the mark, but give it anyway.
Price level v inflation rate: the index going up means prices are rising. The inflation rate going down means they are rising more slowly.
The CPI rises every year (A), even though the inflation rate falls (B). Invented data.
Worked exampleThe CPI rose from 126.4 to 131.5 over a year. Calculate the rate of inflation to 1 decimal place.
Change = 131.5 − 126.4 = 5.1
Inflation = 5.1 ÷ 126.4 × 100 = 4.03…
4.0%
Worked exampleA country's CPI was 150.0 in Year 1, 156.0 in Year 2 and 159.9 in Year 3. Did prices fall in Year 3?
Year 2: (156.0 − 150.0) ÷ 150.0 × 100 = 4.0%
Year 3: (159.9 − 156.0) ÷ 156.0 × 100 = 2.5%
The rate fell from 4.0% to 2.5%, but it is still positive
No. Prices still rose in Year 3, just more slowly than in Year 2.
Worked exampleMaya's pay rose by 3% over a year in which CPI inflation was 5%. What happened to their real pay?
Real change ≈ pay rise − inflation
≈ 3% − 5% = −2%
Their real pay fell by about 2%: their pay buys less than a year earlier.
Exam tipExaminers report many answers that averaged the CPI values instead of finding the change, and others that divided by the wrong year. Write the formula first.
Percentage change
(New value − original value) ÷ original value × 100.
3.2.2.4 Inflation and price stability
Price stability and the 2% target
Price stability is one of the government's main economic objectives: low and stable inflation.
The target is 2% CPI inflation, set by the government. The Bank of England is responsible for meeting it, mainly by changing Bank Rate (see Interest Rates and Monetary Policy).
If CPI inflation is more than 1 percentage point away from 2% (above 3% or below 1%), the Bank's Governor writes an open letter to the Chancellor explaining why and what the Bank will do.
Why not 0%? A little inflation gives a safety margin against deflation, when people may delay spending because they expect prices to fall, which can hit output and jobs.
Why ‘stable’? Predictable prices help households and firms plan: wage deals, contracts, saving and investment.
In September 2026, CPI inflation was 3.5%, above the target band. Last checked: November 2026.
Watch outAQA's vocabulary list says price stability is inflation ‘within 1% to 3%’. The target is 2%; 1% to 3% is only the band that triggers an open letter.
Exam tipDon't write ‘the government sets interest rates’. The government sets the target; the Bank of England sets Bank Rate to meet it.
Price stability
Low and stable inflation; in the UK, a CPI inflation target of 2%.
Inflation target
The rate of inflation the government wants: 2% on the CPI measure.
3.2.2.4 Causes of inflation
Cost-push inflation
Cost-push inflation: inflation caused by rising costs of production. Firms pass the higher costs on as higher prices.
Higher wages, especially if pay rises faster than productivity.
Dearer raw materials and energy: oil, gas, electricity, metals, food ingredients.
A fall in the value of the pound: imported goods and raw materials cost more in pounds.
Higher indirect taxes, such as a rise in VAT or fuel duty, add to prices.
Supply shocks: a war, a bad harvest or blocked shipping routes can push up costs suddenly. In 2026, conflict in the Middle East disrupted energy supplies and pushed up energy prices.
Two routes to a higher price level
Exam tipBuild a chain: cost rises → firms' costs of production rise → firms raise prices → the average price level rises. Each link earns credit.
Cost-push inflation
Inflation caused by rising costs of production, such as wages, energy or raw materials.
Supply shock
A sudden event that raises costs or cuts supply, such as a war or a bad harvest.
3.2.2.4 Causes of inflation
Demand-pull inflation
Demand-pull inflation: inflation caused by total spending in the economy growing faster than the economy can produce goods and services.
Firms can't raise output fast enough, so there are shortages, and they can raise prices without losing sales.
It is most likely in a boom or strong recovery, when unemployment is low and firms are near full capacity.
Causes: consumers spending more (rising incomes, cheap or easy borrowing, high confidence); firms investing more; more government spending or tax cuts; more demand for exports.
Low interest rates can add to demand by making borrowing cheaper.
Wages can link the two causes: strong demand for workers pushes up pay, which raises firms' costs (cost-push).
Exam tipOnly half of students gave a full definition of demand-pull inflation in a recent exam. Many described one product's price rising. Say demand in the whole economy growing faster than output.
Demand-pull inflation
Inflation caused by total demand in the economy growing faster than the economy's ability to supply.
Boom
A period of fast economic growth, with high spending and low unemployment.
3.2.2.4 Consequences of inflation
Consequences of inflation for different groups
Not everyone loses. Who gains or loses depends on whether their income keeps up with prices and on whether interest rates are fixed or variable.
Unexpected inflation does more harm than inflation people planned for.
Deflation has costs too: people delay buying, the real value of debts rises, and firms cut output and jobs.
Group
Likely effects of high inflation
Consumers and workers
If pay rises more slowly than prices, real incomes fall and living standards drop. Workers may push for higher pay.
People on fixed incomes
Some pensions, benefits and fixed allowances buy less if they are not raised in line with prices.
Savers
If the interest rate is below inflation, the real value of savings falls.
Borrowers
Inflation reduces the real value of a fixed debt, especially if wages keep up. But lenders may raise interest rates.
Firms
Rising costs; uncertainty makes planning hard, so investment may be delayed. Time and money spent changing prices (menu costs).
Exporters
If UK inflation is higher than other countries', UK goods become dearer abroad: less competitive, so export sales may fall.
Government
Pays more for public-sector pay, supplies and benefits linked to prices; may receive more tax as prices and wages rise; higher interest rates raise debt costs.
Exam tipQuestions often say ‘to different groups’ or name one group (households, businesses). Stay with the group named, and explain why it is affected.
Fixed income
Income that does not automatically rise with prices.
Competitiveness
How attractive a country's goods are, in price and quality, compared with other countries'.
Menu costs
The time and money firms spend changing their prices.
3.2.2.4 Government policies to manage inflation
Policies to manage inflation
Match the policy to the cause. Cutting demand works directly on demand-pull inflation. With cost-push inflation, it can lower prices only by squeezing spending and jobs further.
Conflicts: policies that cut inflation can also slow growth and raise unemployment (see Government Objectives and Economic Growth).
Time lags: interest-rate and tax changes take months to have their full effect.
In November 2026 the Bank of England raised Bank Rate to 4%, giving the jump in energy prices and the inflation it expected as reasons. Last checked: November 2026.
Policy
How it lowers inflation
Best for
Higher interest rates (monetary policy, by the Bank of England)
Borrowing dearer, saving more attractive, so spending falls
Demand-pull
Higher taxes or lower government spending (fiscal policy)
Less income to spend, so demand falls
Demand-pull
A stronger pound
Imports and imported raw materials become cheaper
Cost-push from import prices
Supply-side policies
Raise productivity, so output can grow without prices rising
Long run, both
Exam tipOnly 30% of students got an MCQ right that paired a tax rise with a rise in the exchange rate. Both reduce inflation: higher taxes cut demand, and a stronger pound makes imports cheaper.
Monetary policy
Changing interest rates (and the money supply) to influence the economy; carried out by the Bank of England.
Fiscal policy
Changing government spending and taxation to influence demand in the economy.
3.2.2.4 Inflation and price stability
UK inflation: recent figures and what they show
2022: CPI inflation peaked at 11.1% in October 2022, the highest for about 40 years, driven by energy and food prices as economies reopened after the pandemic and war in Ukraine hit gas supplies.
2026: conflict in the Middle East from February 2026 disrupted energy supplies. CPI inflation was 3.5% in the 12 months to September 2026, up from 3.1% in August (ONS, published 21 October 2026).
On 5 November 2026 the Bank of England raised Bank Rate from 3.75% to 4%. It said it expected inflation to reach about 5% by mid-2027.
The Office for Budget Responsibility's October 2026 forecast had CPI inflation back at 2% in 2028.
Pay: regular pay grew 3.7% a year in June to August 2026. After allowing for inflation, ONS calculated that real regular pay grew 0.8%. ONS compares pay with prices over the same June to August period, when inflation was lower than September’s 3.5%, so you can’t get this figure by subtracting 3.5 from 3.7.
For comparison, in September 2026 CPIH was 3.6% and RPI 3.9%.
Reading the figures: 2026 is mainly a cost-push story (energy). People disagree about how far raising interest rates should be used against it: supporters say it stops price rises spreading into wages; critics say it adds to the squeeze on households and firms.
Last checked: November 2026. These figures change every month: check the ONS link below for the latest.
Exam tipPast papers quote older figures (a Bank Rate of 0.5%, for example). Use the figures the paper gives you. If you add your own, give the date.
ONS
The Office for National Statistics, which publishes the CPI each month.
Genious