Growth and inflation
A moment ago we touched on growth rates. Inflation – a general increase in prices – is simply a manifestation, albeit usually unwanted, of growth. Accordingly, the same arithmetic applies. For example, if inflation is 5% a year for three years, the overall increase in prices is 1.05 × 1.05 × 1.05 or 15.8%.
Inflation erodes the value of money. Unadjusted prices – the amounts that you and I pay in the shops – are known as current prices. Prices adjusted to remove the effects of inflation are known as real or constant prices. For example, if inflation is running at 5% per annum and a company raises its prices by 7%, the real increase is 7 − 5 = 2%.
Governments produce various indices of prices – the retail price index, consumer ...
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