2.4 inflation Flashcards
define inflation
a sustained increase in the average price level. the rate of change of the average pice level - the % annual rate of change of the consumer price index
define disinflation
a fall in the inflation rate. it means that the general price level is increasing at a slower rate
define deflation
when there is actually a fall in the average PL (negative inflation)
define hyperinflation
a rapis and unchecked increase in the PL. typically it involves inflation rates of greater than 50% or even greater than 1000%
explain the policy objective of low/stable inflation
attempts to create stability in the overall equilibrium PL. gov’s target is 2% (CPI)
why is the target of low and stable inflation important
high/volatile inflation may deter firms from investing and therefore hinder EG. firms base investment decisions on future expectations. inflation makes it hard to form reliable expectations for the future. a stable macro environment is crucial for EG to happen
define nominal values in the context of inflation
the unadjusted rate or current price, without taking inflation into account
define real values in the context of inflation
adjustments are made for general PL changes (inflation) over time
how to calculate index numbers
current value of index = (current value/base value) x 100 –> to compare 2 years not including the base year calculate % change
how do we measure inflation
consumer prices index (CPI) and the retail prices index (RPI) - two baskets comprising different goods and services. both weighted price indexes based on how often goods are bought - changes in weight reflect shifts in spending patterns as measured by the family expenditure survey
difference between cpi and rpi
rpi includes housing costs like mortgage interest payments and council tax but cpi doesn’t
detail about the cpi
inflation rate is calculated each month by looking at changes in prices for over 700 goods and services in 150 different areas in the UK. known as the basket of goods and is regularly updated to reflect changes
how to calculate a weighted price index for this year
the sum of (price x weight)/ sum of the weights
how to calculate rate of inflation
the % change in price index from one year to another
advantages of using cpi and rpi to measure inflation
large categories make cpi a legit indicator, measurable (quantifiable)