Table 1 gives the consumer price index for a country where food and transport costs are important for consumers. Year Consumer price index 2024 120 2025 126...
Question 1 Report
Table 1 gives the consumer price index for a country where food and transport costs are important for consumers.
| Year | Consumer price index |
|---|---|
| 2024 | 120 |
| 2025 | 126 |
(a) Calculate the inflation rate between 2024 and 2025. Show your working. [2]
(b) Which group is most likely to lose purchasing power when prices rise but its income is fixed: borrowers, pensioners with fixed payments, or firms with rising profit? [1]
(c) Explain one possible effect of inflation on a firm's costs. [2]
Answer Details
(a) Inflation is the percentage increase in the general price level. Using the consumer price index:
\[\text{Inflation rate} = \frac{126-120}{120}\times100 = 5\%\]
The inflation rate between 2024 and 2025 is 5%. [2 marks]
(b) Pensioners with fixed payments are most likely to lose purchasing power. Their money income does not rise, but prices do, so their fixed pension buys fewer goods and services. [1 mark]
(c) Inflation may raise the prices of a firm’s inputs, such as raw materials, energy and wages. This increases production costs. If the firm cannot raise its selling price by enough to cover these higher costs, its profit will fall. [2 marks]
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