Inflation Inflation is the rate of increase in the average price level of an economy, causing a decrease in the purchasing power of consumers. Deflation is the negative inflation. It is the decrease in the average prices in an economy. Disinflation is a fall in the rate of inflation. Note that inflation is still occurring during disinflation, just at a slower rate. Calculating inflation Inflation is calculated using the consumer price index (CPI). This is a weighted price index that measures the general level of prices in the UK by measuring the prices of a bundle of consumer goods and services (representative of overall consumption) at different points in time. In doing so the percentage change in CPI over time provides an estimate of the rate of inflation. Yet there are limitations to using CPI as a measure of rate of inflation: - CPI doesn't take into account changes in the qua...