Question

Which of these sound like inflation, which sound like deflation, and which are ambiguous?

1. Gasoline prices are up 10%, food prices are down 20%, and the prices of most services are up 1– 2%.
2. Gas prices have doubled, food prices are up 50%, and most services seem to be up 5% or 10%.
3. Gas prices haven’t changed, food prices are way down, and services have gotten cheaper, too.

Short answer

1. Ambiguous
2. Inflation
3. Deflation

Step-by-step solution

Explanation for part (a)

Since prices of some commodities are moving up while that on food items are falling, it does not show a clear effect on the overall price level. The situation is ambiguous.

Explanation for part (b)

As the prices for all the commodities are moving upward, the general price level is increasing. Thus the economy is passing through inflation.

Explanation for part (c)

Although the gasoline prices are constant, the overall price level is falling because food items and other services have gotten cheaper. Thus, there is deflation in the economy.