Final answer:
The decline in the CPI from 110 to 108 this year signifies deflation, which is a decrease in the overall price level of goods and services. The inflation rate's accurate calculation is based on a percentage change rather than a simple subtraction of CPI figures.
Step-by-step explanation:
If the Consumer Price Index (CPI) was 110 last year and is 108 this year, this indicates that the overall level of prices for the standard basket of goods and services has decreased. This phenomenon is referred to as deflation. Deflation is the opposite of inflation, and it represents a decline in the price level of goods and services over time.
Regarding the calculation of inflation rates based on CPI changes, it's important to note that the inflation rate is not simply the subtraction of two CPI figures. Instead, the percentage-change calculation must be applied to provide a precise measure of the inflation rate.
For example, to calculate the precise inflation rate when the price index moves from 107 to 110, we would use the formula:
100 x (New CPI value – Old CPI value) / Old CPI value.
This formula would provide a precise percentage change rather than a flat difference.