08 - Inflation

Question 1

What is inflation?

Answer 1

A sustained increase in the level of prices over a period of time leading to a fall in the purchasing power of money

Question 2

What is deflation?

Answer 2

General decrease in the price level over time (negative inflation rate)

Question 3

What is disinflation?

Answer 3

Reduction in the rate of inflation (falling inflation rate e.g. 3% to 2%) Still rising price level but at a lower rate

Question 4

What is hyperinflation?

Answer 4

Very high and acceleration rate of inflation rapidly eroding the real value of currency

Question 5

What is price stability?

Answer 5

Low and stable inflation so prices do not change

UK inflation target is 2%

Question 6

How is inflation measured?

Answer 6

Retail price index

Consumer price index - measures monthly change in price of goods and services

Question 7

What is the equation for inflation?

Answer 7

Current year index - previous year index / previous year index x 100

Question 8

What are the differences between CPI and RPI?

Answer 8

CPI covers a broader sample of the population than RPI

RPI excludes top earners and those on benefits

CPI used to index benefits, tax and public pensions
RPI used to index government debt payments and private sector pensions