Separate price levels from the pace of increases
Inflation describes a broad increase in prices of goods and services. Its rate shows the change in an index between periods. If a positive rate falls, prices across the basket may still rise, just more slowly. Disinflation means this slowing of inflation; deflation means a broad decrease in prices. A single product being on sale does not demonstrate that the economy as a whole is experiencing deflation.
Follow a fictional calculation in two steps
Imagine a hypothetical basket costing 100 monetary units. After a 10% increase, it costs 110. If it rises by 2% in the following period, it reaches 112.20. The rate has fallen from 10% to 2%, but the basket has not returned to its original price. This example only demonstrates the difference between pace and level. It is not an observed price series, an economic forecast or a description of any country’s actual experience.
An index is not every household’s exact experience
Indexes combine many prices, with weights intended to represent spending patterns. Households do not all buy the same things in the same proportions. The change felt in a particular budget can therefore differ from the published rate. Monthly, year-on-year and annual average comparisons also differ. Before comparing two figures, check that they use the same measure, period and coverage. Different bases can create an apparent contradiction.
Read a headline without turning an example into a forecast
When you encounter an inflation headline, find the indicator, period, source and whether the figure is provisional. Ask whether it describes a smaller positive rate or prices actually falling. To observe a personal expense, keep the product, quantity and date comparable. That record explains that purchase; it does not replace a general index. This article presents concepts and illustrative calculations, without recommending investments or predicting future prices.
