Inflation Flashcards
What is inflation?
A sustained rise in the general price level in the economy leading to a fall in the purchasing power of money.
What is the difference between disinflation and deflation?
Disinflation - decrease in rate of inflation
Deflation - sustained fall in the general price level in the economy
How is consumer price index (CPI) calculated?
Living costs + food survey asks 7k ppl per yr about spending habits.
Sets basket of 700 G/S, items are weighted (share of expenditure)
Price data collected monthly, Index - sum of £ x weight / sum of weights.
% change compared to that month in previous year
State and explain 4 limitations of CPI.
Not representative of typical households, (not everyone has a car), people have different spending patterns, £ may rise due to better quality G/S not inflation, basket of goods is slow to respond to new products.
State and explain 2 advantages of using CPI.
CPI is used in most European countries, index can be used to compare inflation over time (in relation to a base yr)
What is the difference between CPI and RPI?
RPI takes housing costs into account (eg. mortgage interest, council tax), also uses a different basket of goods w/ different weighting.
What is the difference between demand pull and cost push inflation?
Demand Pull - caused by excess AD, economy close to full capacity, supply can’t meet demand, +ve o/p gap.
(linked to money & credit boom)
Cost Push - Rising wage costs/ price of raw material/ rising imports (falling exchange rates), therefore firms have to put up the prices.
What kind of administered prices can cause inflation?
Change in regulated prices (water and electricity bills), changes in indirect taxes and subsidies, change in environmental taxes.
What are 4 internal causes of inflation?
Increasing property prices (wealth effect), higher wages/ labour costs, boom in credit/ money supply, rise in business taxes (increase CoP)
What are 3 external causes of inflation?
Increased global commodity prices (oil), depreciation of exchange rate (weak pound), high inflation in other countries.
What are 7 problems with high inflation?
Inequality - poorer ppl hold money in cash
Falling real incomes - if wage changes don’t keep up with inflation
Negative real IR - if interest on savings is lower than inflation
Cost of borrowing - if IR increases, those in debt owe more
Wage inflation - if wages increase, CoP increases
Less competitiveness - imports dearer
Uncertainty
Who are 3 of the winners from high inflation?
Workers whose wages increase with inflation, those in debt if IR < inflation, firms if prices rise faster than costs.
Who are 4 of the losers from high inflation?
Retired ppl on fixed income (real value down), lenders if IR < inflation, savers if interest < inflation, low income earners.
Give 4 reasons why forecasting inflation is so difficult?
Volatile commodity prices, gvt taxes can change, exchange rates change, AD changes
What are 6 problems with deflation?
Consumers hold back on spending
Real value of debt rises -> income redistributes to lenders
Cost of borrowing rises - if IR falls slower than inflation
Less profit - low £, less revenue
Low confidence - reverse wealth effect, less spending.
(But more saving, increases real value - more spending when £ cheap)
Exports - eventually get cheaper and competitive but high u/e (cyclical) in the short run
