Final answer:
If the CPI decreased from 110 to 108, this is referred to as deflation. While the CPI may change by a constant number, the inflation rate should be calculated as a percentage change, and can differ each year.
Step-by-step explanation:
If the Consumer Price Index (CPI) was 110 last year and is 108 this year, the phenomenon is known as deflation. Deflation occurs when there is a decrease in the general price level of goods and services in an economy over a period of time. It is the opposite of inflation, which is characterized by an increase in the price level of a basket of goods and services.
Regarding the question about the CPI changing from 110 to 115 one year, and then from 115 to 120 the next year, it's important to clarify that while the index number increases by five points each year, the inflation rate is not simply 'five.' Instead, the inflation rate is calculated as a percentage change.
For example, the inflation rate as the price index moves from 110 to 115 is 100 x (115 - 110) / 110 = 4.55%. When the index moves from 115 to 120, the rate is 100 x (120 - 115) / 115 = 4.35%. As these calculations show, even with a constant numerical change in the index, the proportionate change (the inflation rate) can differ each year because it's based on the relative change from the previous year's index.