Inflation and deflation — practice question

For a period of time, many central banks have aimed for an inflation target of around 2%. A modest, regular increase in the general price level can generate several advantages for an economy. For central banks and governments, the earlier challenge was preventing inflation from rising above the target while still keeping unemployment low. The issue has now altered, and the danger is that inflation may drop below the target rate. By the end of 2014, China’s consumer prices index was 100.5. The country’s inflation rate in 2015 was 2%. At the same time, several European countries experienced deflation. This produced a number of effects, including a wider wage gap between skilled and unskilled workers. A key cause of the downward pressure on inflation was the global price of oil falling from US$120 to US$66 a barrel in 2015. This lowered the cost of energy and transport. Reduced transport costs also had a clear effect on food prices. Fig. 1 shows the way the food market was influenced in 2015. As inflation fell, some countries also saw unemployment fall. Other countries, however, faced both lower inflation and higher unemployment. For instance, France experienced rising unemployment between 2014 and 2015. This created upward pressure on French Government spending.