2.1.2 Inflation Flashcards
What is inflation?
It’s the general increase of prices in the economy
Which lowers purchasing power of money
What is deflation?
It’s the persistent fall in prices in an economy in a year
What is disinflation?
It’s a reduction in the rate of inflation
Prices are still rising, but they are not rising by as much
How to calculate index?
New figure over base figure times 100
What is consumer price index used for?
Used to measure an annual rate of inflation
Name the steps in calculating consumer price index
Family expenditure survey carried out by ONS
Once data collected consumer basket of most popular goods and services formed with average prices attached. It’s represents what average family buys and a survey is sent to retailers
After the prices of these goods and services are weighted based on percentage of income
Sped 10 percent on fuel weight = 0.1
After weighted prices are added up to give total weighted price of the basket
How to work out annual rate?
Difference between years divided by original times by 100
What are the disadvantages for consumer price index?
Does no include price of housing as houses tend to rise more than the price of all the goods
Good subject to price fluctuations, e.g. food and energy
The average family personal inflation rates may differ as families may not buy the same stuff as others
Therefore, CPI measures an average rate of inflation and is not totally representative
What is the retail price index?
Retail price index includes housing costs mortgage interest payments council tax CPI doesn’t
How is retail price index different to consumer price index?
RPI includes housing costs CPI doesn’t
CPI takes into account when prices rise people switch to product that has gone up less CPI tends to be lower than RPI
RPI excludes the top 4% of income earnings and low income pensioners. (They aren’t average household) CPI covers all households and income.s
What is demand pull inflation?
And how does it occur?
Demand inflation occurs when AD shifts to the right
It occurs as there is greater pressure on existing FOP’s to produce more output becoming scarcer prices goes up
What needs to AD to shift right?
Low
interest rates income and corporation tax, consumer and business confidence government spending and weak exchange rate
What is cost push inflation?
And why does this occur?
It occurs when Sras shifts to the left
Because when COP increases and when firms face high COP they will pass those higher costs onto consumers via higher prices
What leads to sras to shift left?
High
Raw material prices, wages, business taxes, price of import materials due to week exchange rate?
Are the costs of high inflation?
Lower purchasing power
Erosion of savings as interest rates not rising in line with inflation savings news value
Low export competitiveness
Wage and consumer Price spirals due to anticipation
Fiscal drag when workers wages are in line with inflation
Inflation noise inflation rate is volatile there is uncertainty
What are the benefits of low and stable inflation?
Workers with higher wages and can easily bargain
Consumption is natural without anticipation they buy when they need to
Firms encourage to increase output they can increase prices make more revenue
Keep unemployment low and recession by giving small pay rise
Reduce real value of debt as wages profits are up
Government finances will go up as well due to tax revenue
Some evaluative points for the costs and benefits of inflation
The rate of inflation,
the causes
the duration whether it’s anticipated or anticipated
and stability of rate
What is the demand side deflation?
Known as bad deflation it occurs when AD shifts left
What does demand side deflation cause?
Causes low economic growth
Deflation could be long-term and anticipated
Why is anticipated deflation dangerous?
Causes a deflation spiral
Rational consumers delay spending
Real interest rates positive leads to saving
Artist service depth as it increases real value of debt
What is supply side deflation?
Known as good deflation
Occurs when Sras shifts right
Does supply side deflation cause and why is it good?
Comes with higher economic growth
Deflation is short-term and unanticipated so won’t see into peoples mind
Falling prices for consumers, they can buy goods and services cheaper improving their standards
Folding input prices for firms as COP low and profits High
What are the benefits of a 2% inflation rate in the economy?
Having a small amount of inflation can help avoid deflation and anticipation
Encourage spending an investment as a little bit of inflation encourages people to spend rather than holding onto it
Provides flexibility for interest rates and shows economic disability as a predictable level of inflation so essentially a 2% inflation rate is seen as a sweet spot
