Lesson 03 · 4 min · 6 things to do
The rate is a speed, not a level
Read an inflation rate as how fast prices climb, not how high they are.
Inflation falls from 9% to 3%. What has happened to prices?
- Yes.3% is a speed, and it is a speed upward. Everything that got dearer at 9% stayed dearer — it is simply climbing at a gentler angle now.
- Not quite.This is the most common misreading of a falling inflation figure, and it is why 'inflation is down' so often lands badly with people doing the shopping.
- Not quite.That would be 0%. At 3% a £100 basket is £103 next year — the rise is smaller, not absent.
Slide the rate and watch what a £100 basket costs over ten years.
2%5%9%2%£100 becomes £122. Ten years is barely noticeable year to year.
5%£100 becomes £163. Still a gentle-looking line, and a third of your money is gone.
9%£100 becomes £237. The line bends upward — each year's rise is bigger than the last.
Why does the line bend upward instead of running straight?
- Yes.5% of £163 is more than 5% of £100. The rate is steady and the steps get larger — that is what compounding is, in one sentence.
- Not quite.It is fixed in every frame. The bend comes from what the percentage is taken OF, not from the percentage.
- Not quite.Not as a rule — plenty of expensive things get cheaper. The bend here is arithmetic, not behaviour.
Move the control to see what changes.
A rate is a speed. Prices only actually fall when the rate goes below zero, which is rare enough to have its own name: deflation.
A basket costs £100. Prices rise 5% this year, and 5% again next year. What does it cost after two years, to the nearest penny?
£Yes.£105, then 5% of £105 — not of £100. The extra 25p is the whole idea of compounding, and over decades that 25p is where most of the damage lives.Which of these tell you about the SPEED of prices, and which about the LEVEL?
"Inflation was 4.1% last month."
"A weekly shop now costs £96, against £71 four years ago."
"Price rises have eased for the third month running."
"Rail fares are the highest they have ever been."
"Wages are climbing faster than prices."
Yes.Arguments about the cost of living usually have one person talking about the speed and the other about the level. Both can be right at once.Wages rose 4% this year. Prices rose 3%. What happened to what a worker can buy?
- Yes.The gap between the two is the part that matters. A 4% rise in a 3% year is a real gain of roughly 1%; the same 4% in a 6% year is a cut.
- Not quite.That is the pay rise before prices are taken off it. What lands in the trolley is the difference between the two speeds.
- Not quite.Both went up by DIFFERENT amounts, and that difference is exactly what a person feels.
A minister says: "We have halved inflation." What has been halved?
- Yes.Nothing on any shelf got cheaper. The claim is true and it describes an acceleration, which is why it so often sounds false to the person paying.
- Not quite.That would be prices falling by half — deflation on a scale seen roughly once a century, and a catastrophe when it happens.
- Not quite.Inflation figures measure prices, not the money supply. The two are related, loosely and with long delays.
Lesson complete
Inflation is a speed, not a level. Falling inflation still means rising prices.
Next: Doubling, and why it sneaks up →