What is inflation?
Inflation is a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money
How is the rate of inflation measured?
- The rate of inflation is measured by the annual percentage change in consumer prices.
- The British government has set an inflation target of 2% using the consumer price index (CPI)
- It is the job of the Bank of England to set interest rates so that aggregate demand is controlled, inflationary pressures are subdued and the inflation target is reached
- The Bank is independent of the government with control of interest rates and it is free from political intervention. The Bank is also concerned to avoid price deflation
