Chapter 25 Flashcards
Inflation
Is a sustained rise in the general price level over time. Costs of living increase and purchasing power of those on fixed wages decrease
Deflation
Is the opposite of inflation, the average price level falls. There is a negative inflation rate. Purchasing power increase for those on fixed rates
Disinflation
is the falling rate of inflation, the price level is still rising but to a slower extent
Hyperinflation
when inflation rate is high and accelerating, to an extent which is out of control
What is the consumer price index
it creates a basket of goods and they are weighed by what percentage of income is spent on them
What are the limitations to CPI
the basket of goods represents the average household, for those who do not own a car, money is not spent on petrol so would be wrong
Different demographics have different spending patterns
Housing costs our significant expenditure however these are not taken account of.
CPi is slow to respond as it is normally measured once a year
Price fluctuations of certain goods such as energy and food are core to cpi so fluctuations in these can massively affect CPI and disrupt.
Retail price index
Alternative measurement includes housing costs, felt that it represents the cost of living more. tends to have higher value than CPI. RPI has been used for much longer.
Unique to the Uk so hard to compre
What are the 2 causes of inflation
Demand pull and cost push
What is demand pull inflation
When aggregate demand is growing at a fast rate, this puts pressure on resources. Producers increase their prices and earn more profits due to the higher demand.
Main triggers: Interest rates fall, Fiscal stimulus (lower taxes), high growth of the UK export market
What is cost push inflation
This occurs due to rising costs on the supply side.
Could be due to more expensive raw materials, increase in cost of labour. Expectations of rising inflation.
Could lead to wage cost spiral if workers demand higher wages
Monoplies exploiting their position
Concequences of inflation
Consumer: Those on low and fixed income are hit the hardest due to the regressive effect. The cost of food and other necessities go up and the purchasing power of their money falls all when their wage stays the same.
If consumers have loans the values of repayment is lower, because the amount owed does not increase with inflation, so the real value of dept decreases.
Firms: Low interest rates means investment is more attractive than saving profits. With inflation interest rates are likely to be higher and firms are less likely to invest.
Workers are likely to demand higher wages due to the cost of living, this would increase production costs.
Firms may be less price competitive on a global scale if inflation is high, but this does depend on if it happens in other countries to or not.
Unpredictable inflation will reduce business confidence, since they are less aware if what their costs will be. This could mean there is less investment
The government: The government will have to increase the value of state pension and welfare payments as the cost of living increases.
Workers: Real incomes will fall with inflation, they will have less disposable income.
If firms face higher costs, there could be more redundancies when firms try and cut their costs.
Causes of deflation
Sharp decline in consumer spending, expensive items,
What is the formula for CPI
CPI = Cost of basket in 2021/cost of basket in base year
What is the formula for the inflation rate
Inflation rate = New CPI - Old CPI / Old CPI * 100
What is an index number
Comparing a value of a variable with a base observation
