SpawnLearnEconomics · 3 MIN READ
Inflation: when the same money buys less
See how inflation affects purchasing power and real income with a worked example and a short quiz.
By SpawnLearn · Updated
Think about a basket, not one price
Inflation describes an increase in the general price level over time. One expensive item does not tell the whole story. The Consumer Price Index measures changes in prices paid by urban consumers for a representative basket of goods and services. Your own spending mix can produce a different experience.
A slower increase is still an increase
If inflation falls from 5% to 2%, prices are generally rising more slowly. They have not necessarily returned to their earlier level. A fall in the general price level is deflation. Separating the rate of change from the level helps you interpret headlines.
Separate nominal from real
Nominal income is the amount of money you receive. Real income adjusts for changes in purchasing power. A pay rise below inflation can leave you able to buy less despite a larger paycheck. The exact change compares the income growth factor with the price growth factor, rather than simply subtracting percentages.
Keep this in mind: More money and more purchasing power are different things.
Go a little deeper
Three questions. See what sticks.
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