consequences/causes of inflation Flashcards
inflation
a rise in prices which can be translated into a decline of purchasing power over time
Purchasing power
the amount of goods and services that a currency can buy.
it measures the real value of money in terms of what it can actually purchase in the market
Inflation is measured using …
Consumer Price Index
what happens when
When inflation rises…
the general price level of goods and services also rises, therefore decreasing purchasing power.
reduced purchasing power =
means that people can buy fewer goods and services with the same amount of money.
what happens if
incomes rise at a slower rate than inflation
If incomes rise at a slower rate than inflation then people have lower material living standards. Those on fixed or low incomes suffer the most and poverty may increase
Shoe leather costs=
thetime it takes for households and firms to searchfor cheaper prices. This is an opportunity cost
what does confusion and uncertainty cause when there is a rise in prices
If prices are constantly increasing, price signals become distorted and it creates uncertainty in the economy.
Planned investment and spending may fall
inflation can cause
Reduced international competitiveness =
If relative inflation rates are higher than other countries, our exports appear more expensive. It may worsen a current account deficit as a result (If a country is sending more money out than is coming in)
what happens
If inflation is anticipated…
- consumers: it can cause inflation as households spend now to avoid higher prices down the line.
- Anticipated inflation may also encourage workers to negotiate higher wages
- businesses would raise prices for their goods and services to maintain profitability.
what happens
If inflation is unanticipated…
it may discourage spending as households/firms lose trust in the value of money and the value of their investments
Interest Rate Adjustments:
Central banks often respond to inflation by adjusting interest rates. Inflationary pressures may lead to higher interest rates, which can impact borrowing costs and investment decisions.
what happens if
if wages are not increaseing in line with inflation…
it reduces the ability to purchase goods and services,
lowering material living standards, especially for those on the lowest incomes in society.
what are wieghted goods in the CPI
the weightings assigned to each item in the basket are intended to reflect the relative importance of that item in the average household’s budget
what is the CPI
The UK Consumer Price Index (CPI) is a measure of inflation that is calculated by the Office for National Statistics (ONS). It measures the change in the price of a basket of goods and services consumed by households in the UK.
