Lesson 03 · 4 min · 6 things to do
A speed, not a level
"Inflation has halved" is one of the most misread sentences in the news, and the misreading is completely reasonable.
- Inflation, last year10%Inflation, this year5%
Inflation was 10% last year. This year it is 5%. What did prices do this year?
- Not quite.Halving is what the RATE did. The rate is how fast prices are climbing, and half as fast is still climbing.
- Yes.A 5% inflation rate means prices are 5% higher than a year ago. The rate came down. The prices did not.
- Not quite.Prices stay still when the rate is zero. Five per cent is a rise, on top of last year's ten.
A basket cost £100 two years ago and £110 last year. Change this year's inflation rate and watch where the price ends up.
Two years ago£100Last year£110This year£107.80-2%This year prices FELL. The only setting where the pound buys more than it did last year, and still less than two years ago.
Two years ago£100Last year£110This year£1100%Prices stopped rising and sat at £110. Still a tenth above two years ago.
Two years ago£100Last year£110This year£112.202%Rising slowly, and still rising. The figure is £112.20.
Two years ago£100Last year£110This year£115.505%Inflation halved from 10% to 5%. The basket is £115.50, the dearest it has ever been.
Two years ago£100Last year£110This year£12110%Same speed as last year. The basket is £121 and climbing.
In how many of those settings did prices head back towards £100?
- Not quite.The rate fell from 10% to 5% and the basket rose to £115.50. A slower climb is still a climb.
- Yes.A falling rate slows the climb. Only a rate below zero reverses it, and even −2% left the basket above where it started.
- Not quite.Zero means prices stopped. They stopped at £110, a tenth above the start, and stayed there.
Move the control to see what changes.
- Year to October 202211.1%Year to October 20234.6%
The UK's real figures. UK prices rose 11.1% in the year to October 2022, then 4.6% in the year to October 2023. Compared with October 2021, roughly how much higher were prices in October 2023?
%The second rise sits on top of the first: multiply 1.111 by 1.046.
Yes.About 16%, because 1.111 times 1.046 is 1.162. The rate fell by more than half and prices climbed the whole time. The second year's rise sat on top of the first. Which of these headlines say prices FELL, and which say they rose more slowly?
Inflation falls to 3.2%
Prices lower than a year ago
Inflation drops to lowest in two years
Inflation turns negative
Rate of price rises halves
Shop prices down 1% on last year
Yes.Every headline with the word inflation in it is about the speed. Prices fall only when the speed goes below zero, and headlines say so in other words: lower, down, negative.A weekly shop cost £100 two years ago. Inflation was 10% last year and 5% this year. Slide the marker to what the same shop costs now.
Slide the marker to your guess and lock it. Nothing is scored — the point is to have your own number before you see the real one.
Two years ago · £100Last year · £110you said · £90actually · £115.50The shop now: —
Most guesses land below last year's £110, because "inflation halved" sounds like something came down. Only the speed came down. The shop is 5% dearer than last year, on top of last year's 10%.An inflation rate is a speed, not a height. "Inflation fell" means prices are climbing more slowly. They fall only when the rate goes below zero.
- Start£100After the 11% year£111After the 2% year£113.22
A basket that cost £100 at the start. A politician says: we have brought inflation down from 11% to 2%, so the cost of living squeeze is over. What can a reader say is true?
- Not quite.Two per cent is a rise. For prices to fall the rate would have to go below zero, and central banks work quite hard to stop that happening.
- Not quite.The rate is back to normal. Prices are 13% above where they started, and a 2% rate adds to that rather than taking from it.
- Yes.The rate is back to normal. The level is not, and it will not come back on its own: 2% a year is the level going up, slowly, for ever.
Lesson complete
Inflation is a speed, not a level. Falling inflation still means rising prices.
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