2.1.2 Inflation Flashcards
What is inflation?
is the gradual rising of prices of goods and services
What is deflation?
negative rate of inflation leading to falling prices
What is disinflation?
falling yet positive rate of inflation
Explain how CPI is calculated?
through the basket of goods and the surveys of 6000 households
Give 3 limitations of CPI as a measure of inflation
- it doesn’t pick up on short term changes in consumer spending
- it doesn’t take into account mortgage interest repayments and council tax
- it may be inaccurate as people may lie
How often is CPI and RPI calculated?
Annually
Approximately many goods and services are in the basket?
700
At approximately how many locations are price data taken?
6000 households
How often are weightings updated?
Annually
Give an example of 1 product that has been added to the basket over the last year and 1 which has been removed
- Newspaper
- iPhone
Explain the difference between CPI and RPI
RPI tends to be higher
Which is higher?
RPI
What is CPIH?
Consumer Price Index households
Explain what is meant by ‘cost push’ inflation
when producers push the excess costs onto the consumers
Give 3 possible causes of cost push inflation
- Increase in import costs
- increased raw material costs
- wages increase
Explain what is meant by ‘demand pull’ inflation
excess demand for a good or service
Give 3 possible causes of demand pull inflation
- reduced taxation
- lower interest rates
- weaker exchange rate
Explain how growth in the money supply can cause inflation
there’s more money for investments
Explain the effects of inflation on consumers/workers
- consumers will purchase goods and services before the prices go up
- workers will demand higher wages to cater to the price increase
Explain the effect of inflation on firms
- firms will pass on their excess costs onto the consumer, which will fuel higher prices and inflation
Explain the effect of inflation on the government
they will tell BoE to maintain 2% inflation rate
Explain possible benefits of inflation
Reduces the real value of debt
