2.4 Inflation

Question 1

What is the definition of inflation ?

Answer 1

inflation is defined as a sustained increase in the average price level of an economy over a given period of time

• inflation means that the purchasing power of money falls over time.

Question 2

What is the definition of deflation ?

Answer 2

deflation is defined as a sustained decrease in the average price level of an economy over a given period of time

Question 3

What is the inflation rate ?

Answer 3

inflation rate is the percentage change in the average price level over a given period of time

Inflation is indicated by +rate
Deflation is indicated by -rate

Question 4

What is disinflation ?

Answer 4

disinflation means a fall in the rate of inflation, the price level is increasing but at a slower rate over time

Question 5

What is hyper inflation ?

Answer 5

hyperinflation means a very high rate of inflation; prices are increasing so fast there is a severe loss of confidence in the value of money

Hyperinflation inflation: 50% a month, meaning 13,000% annually

Question 6

How is inflation measured ?

Answer 6

• the CPIH is the consumer prices index including owner occupiers housing costs
• the CPIH and CPI are based on consumer prices and the price of a representative basket of goods/services for a typical UK households, these price indices are weighted to certain G/S
• prices of the goods and services are taken from the result of family expenditure survey

Question 7

How to calculate the inflation rate ?

Answer 7

**inflation rate% = ((index value in a given year - index value in previous year)/ index value previous year) x 100 **

• usually calculated year on year

Question 8

What are CPIH and OOH ?

Answer 8

• OOH costs are the costs of housing services associated with owning, maintaining and living in one’s home
• this is useful since these represent a large proportion of consumption expenditure

Question 9

comparing measures of inflation

Answer 9

Question 10

What are the problems in measuring inflation ?

Answer 10

• the basket may not be fully representative for any specific households, difficult to judge typical household
• changing technology can make it difficult to accurately calculate change in the price level
• time lags In inflation calculations
• difficult to account for increasing quality
• shrinkflation: changing the size of products rather than the price could cause issues.
• not comparable due to many different measures of inflation