What this lesson teaches
I can read real GDP, GNI, per-capita figures, unemployment rate, CPI, balance of trade, HDI and the Gini coefficient.
Syllabus 9570, 3.2.1(c). Standard of Living and Macroeconomics Indicators: Macroeconomic indicators; Indicators of economic performance include real Gross Domestic Product (GDP) or Gross National Income (GNI), real GDP or GNI per capita, unemployment rate, Consumer Price Index (CPI) and balance of trade; Human Development Index (HDI) as an indicator to reflect standard of living; Gini coefficient as an indicator to reflect income distribution
Make a guess
Singapore's CPI was 100 in the base year and is 120 now. Did prices rise 20% this year?
- Yes. An index of 120 means 20% inflation this year.
- Not necessarily. Prices are 20% above the base year.
- No. Prices are 120% higher than in the base year.
Show the answer
Not necessarily. Prices are 20% above the base year.
An index compares with its base year. The rise this year is the change from last year's index, which could be much smaller.
A price index compares prices with a base year; the inflation rate is how fast the index is rising.
The Consumer Price Index (CPI) tracks the price of a basket of goods and services bought by a typical household. Each item is weighted by how much households spend on it.
The index is set at 100 in a base year. An index of 120 means prices are 20% higher than in the base year, not that they rose 20% this year.
The inflation rate is the percentage change in the index from one year to the next.
A fall in inflation does not mean prices are falling: it means they are rising more slowly. Different households also face different inflation, depending on what they buy.
- Index
- Compares with a base year of 100.
- Inflation
- Percentage change in the index.
- Lower inflation
- Prices rising more slowly, not falling.
Worked example: Slower inflation, higher prices
CPI is 100 in the base year, 110 in year 1 and 112.2 in year 2.
- Year 1 inflation: 10%.
- Year 2 inflation: (112.2 - 110) / 110 = 2%.
- Inflation fell, but prices still rose: they are now 12.2% above the base year.
- A household that spends more than average on food will face higher inflation if food prices rose fastest.
Watch out for this
When inflation falls, prices fall.
Lower inflation means prices are rising more slowly. Prices only fall with deflation, when the inflation rate is negative.
Check your understanding
CPI rises from 150 to 153. What is the inflation rate?
- 53%.
- 3%.
- 2%.
Show the answer
2%.
Right. (153 - 150) / 150 = 2%.