2.1.2 Inflation ✅ Flashcards
What is a sustained increase in the general cost of living aka fall in purchasing power?
Inflation.
What is a fall in prices and what does this indicate?
Deflation, slowdown in rate of growth of output in an economy.
What do consumers tend to do during deflation?
Postpone purchasing for cheaper prices + fall in investment.
What is disinflation?
Reduction in rate of inflation but still positive. (Price rise but at slower level).
Explain the process of calculating inflation?🏠🧺
- collected by ONS of 710 g/s from 20k stores (prices updated every month)
- House holds record what and how much they spend their money on. (Through foood survey) uses 5,500 houses.
- most popular items are put into a basket of goods and services. (Changes each year)
- basket has a weighting system relating to proportions of income spent. (As change in larger % items will have a bigger effect).
- base year chosen, index of current year always 100.
How do you work out inflation rate?
Current / base X100
What are limitations of CPI in measuring the rate of inflation?
- Basket may not represent all consumer spending habits. (Buy dif items + dif % of income).
- different countries use different inflation measurements like RPI.
- prone to inaccuracy’s (dangerous when considering policies based on this).
- Consumer habits can change in a year.
Retail price index (RPI) as alternate to measuring rate of inflation?
Takes into account housing costs (mortgages, interest payments and council tax) so tends to be higher than CPI.
Excludes top 4% + low pensioners due to not being “average” therfore not representative.
ONS still calculate it but it is not considered best method. (National stat removed)
What are the causes of inflation?
Demand pull
Cost push
Growth of money supplied
What is demand pull?
Increase in AD (any factor that influences this).
Prices determined by D and S therfore either shift will cause it to change.
What is cost push?
Decrease in AS causes prices to increase. As when costs increase (eg supply shock) then firms put prices up to maintain profits.
How does growth in the money supply cause inflation? How can this occur?
People have access to money they will spend it but if there isn’t an increase in amount of G/S supplied then prices will increase.
Printing or borrowing more money. Or banks creating credit (look of PMT).
What are the effects of inflation onto the consumer?
- If incomes don’t rise then they have less to spend therfore cause a fall in living standards.
- Those in debt pay less due to lower value but those who are owed get money back at a lower value.
- Psychological effects = may feel less well-off even if income does rise therefore less spending will still occur.
What are the effects of inflation onto firms?
- Exports less competitive due to inflation being higher than other countries therefore g/s are more expensive. This will effect the balance of payments.
- Inflation/dis/defla are difficult to predict therefore firms find planning difficult.
- There is a cost in changing prices eg reprinting menus/ relabelling.
What are the effects of inflation onto the government?
- If don’t alter excise taxes (set taxes) w inflation then real gov rev will fall (bracket creep).
- Not changing income tax allowances (what they can earn free) then real gov income will increase and tax payers have less money (bad).
