3) Inflation - MB

Question 1

Define inflation

Answer 1

The rate of change of the average price level, eg the percentage annual rate of change of the consumer price index

Question 2

What is an index number?

Answer 2

A way of comparing the value of a variable with a base observation such as a location or past period, eg the retail price index measures the average level of prices relative to a past year, known as a base period

Question 3

What is consumer price index (CPI)?

Answer 3

a measure of the general level of prices in the UK, adopted as the measure of the government’s inflation target since December 2003

Question 4

What is CPIH?

Answer 4

A version of the CPI that takes into account the housing costs of owner-occupiers and council tax

Question 5

What is retail price index? (RPI)

Answer 5

A measure of the average level of prices in the UK

Question 6

What is deflation?

Answer 6

A fall in the average level of prices (negative inflation)

Question 7

What is disinflation?

Answer 7

A fall in the rate of inflation

Question 8

What is hyperinflation?

Answer 8

A situation in which inflation reaches extend or excessive rates

Question 9

Inflation is one of the key indicators of…

Answer 9

Macroeconomic performance

Question 10

How does inflation link to a policy objective of the UK government?

Answer 10

Low and stable inflation is a policy objective of the UK government

Question 11

In the UK what is low inflation?

Answer 11

2%+/ -1% CPI

Question 12

What does stable inflation mean?

Answer 12

It means fluctuations month to month, or year to year, are small

Question 13

What does low and stable inflation cause in terms of I?

Answer 13

Low and stable inflation increases certainty for businesses, and so increases investment (high inflation reduces investment)

Question 14

An increasing price level is…

Answer 14

Inflation

Question 15

A decreasing price level is…

Answer 15

Deflation; the inflation rate is negative

Question 16

An increasing price level at a slower rate is…

Answer 16

Disinflation

Question 17

What are examples of hyperinflation? (When inflation is out of control)

Answer 17

Zimbabwe/Venezuela/ inter war Germany

Question 18

CPI is the… measure of the UK

Answer 18

Official inflation measure

Question 19

When is the CPI produced?

Answer 19

Produced monthly on a rolling basis, based on the preceding 12 months

Question 20

How is CPI produced?

Answer 20

1) Selecting a base year
2) Give this a value of 100
3) Using the Family Expenditure Survey work out what products (goods and services) people spend their money on
4) from this select the most common products (about 650) and create a typical shopping basket
5) attach weights to each product (review products each year)
6) find out how the price of these products change
7) multiply the new price index for each product to find changes in the price level

Question 21

RPI vs CPI

Answer 21

RPI is older, more volatile as a measure, and has some technical drawbacks making it a legacy measure of inflation

Question 22

What are the drawbacks of CPI/RPI? (3 things)

Answer 22

• don’t tell us of price increases represent improvements in quality (eg getting better products for your money)
• only measure fixed basket of products for a year - what’s representative at the start of the year may not be at the end
• don’t take into account seasonal price variations - for this reason a separate measure (core CPI) excludes energy and food

Question 23

What is Core CPI?

Answer 23

A separate measure of CPI that excludes energy and food