2.1.2 Flashcards
What is inflation?
Sustained increase in the general price level
What does inflation lead to?
Fall in the real purchasing power of money
How is inflation measured?
Annual percentage change in consumer prices
What is the governments role in inflation?
It has a set target of 2% using the consumer price index (CPI)
What is the role of the Bank of England with interest rates?
To set monetary policy base interest rates so that inflationary pressures are controlled
What is deflation?
A fall in the general price level fall.
The annual percentage change in consumer prices is negative
What is disinflation?
A slowdown in that rate of increase of prices, prices are still rising but at a slower rate
How does the consumer price index (CPI) measure inflation?
A representative basket of over 700 goods/services used, weights are attached to each item, based on the items importance in people’s expenditure.
Weights are multiplied by price changes
The weighted price changes are then added up to calculate inflation right
What are limitations of CPI?
-Not fully representative
-Spending patters differ from household with/without kids
-Changing quality of goods and services
-New products
-Doesn’t account regional differences in living
What is hyper-inflation?
A period of high rates of inflation, leading to a loss of confidence in an economy’s currency
What is inflation rate?
The annual rate of change of the average price of goods and services
What is purchasing power?
The buying power of a unit of currency
What is unit labour costs?
Reflect total labour costs
What are the main causes of inflation?
-Shortage of supply of oil and gas from Russia meant that demand for oil and gas prices increased worldwide.
-Shortages of many goods, pushes up prices
-Government support for businesses during pandemic has stopped
-Labour shortages so wages increase to attract workers.
