The consequences of inflation for both individuals and the performance of the economy
Inflation erodes what money can buy, hurting people on fixed incomes and savers. High or unpredictable inflation also damages business confidence and weakens an economy's international competitiveness.
Formula
Real interest rate = Nominal interest rate − Inflation rate
Real World
UK savers with easy-access accounts earning 1% in 2022 faced 10%+ inflation, meaning a real return of roughly −9% — their wealth was actively shrinking in purchasing-power terms.
Exam Focus
Distinguish between anticipated and unanticipated inflation — unanticipated inflation causes greater economic damage and earns higher marks in evaluative answers.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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