3) Inflation - MB Flashcards
Define inflation
The rate of change of the average price level, eg the percentage annual rate of change of the consumer price index
What is an index number?
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
What is consumer price index (CPI)?
a measure of the general level of prices in the UK, adopted as the measure of the government’s inflation target since December 2003
What is CPIH?
A version of the CPI that takes into account the housing costs of owner-occupiers and council tax
What is retail price index? (RPI)
A measure of the average level of prices in the UK
What is deflation?
A fall in the average level of prices (negative inflation)
What is disinflation?
A fall in the rate of inflation
What is hyperinflation?
A situation in which inflation reaches extend or excessive rates
Inflation is one of the key indicators of…
Macroeconomic performance
How does inflation link to a policy objective of the UK government?
Low and stable inflation is a policy objective of the UK government
In the UK what is low inflation?
2%+/ -1% CPI
What does stable inflation mean?
It means fluctuations month to month, or year to year, are small
What does low and stable inflation cause in terms of I?
Low and stable inflation increases certainty for businesses, and so increases investment (high inflation reduces investment)
An increasing price level is…
Inflation
A decreasing price level is…
Deflation; the inflation rate is negative
An increasing price level at a slower rate is…
Disinflation
What are examples of hyperinflation? (When inflation is out of control)
Zimbabwe/Venezuela/ inter war Germany
CPI is the… measure of the UK
Official inflation measure
When is the CPI produced?
Produced monthly on a rolling basis, based on the preceding 12 months
How is CPI produced?
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
RPI vs CPI
RPI is older, more volatile as a measure, and has some technical drawbacks making it a legacy measure of inflation
What are the drawbacks of CPI/RPI? (3 things)
- 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
What is Core CPI?
A separate measure of CPI that excludes energy and food
