5.5 Inflation

Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation does not refer to a change in relative prices. A relative price change occurs when you see that the price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means that there is pressure for prices to rise in most economic markets. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped, it would no longer be inflation. Similarly, a consistent fall in the average price level is called deflation.

Concern about changes in the price level has dominated economic discussion since 2022. With inflation in Canada generally averaging only between 2% and 3% each year since 1990, it is not surprising how much attention it has been getting ever since the average inflation rate in Canada rose to 8.1% in June of 2022. As of October 2023, Canada’s average inflation rate has come down to 3.1% (Statistics Canada).