Inflation Flashcards
Inflation
The increase of general price levels
Deflation
A fall in general price levels
Disinflation
A reduction in the rate of inflation
CPI
Consumer Price Index
Describe how CPI is calculated
- a base year is selected and a family expidenture survey is carried out
- a weighted representative basket of goods is made
- all prices are combined to produce an overall price index
Limitations of CPI
- not totally representative
- does not include house prices
- it is recent so can’t be compared to historical data
Why do people argue that all inflation indices overestimate inflation?
they don’t take into account the fact that goods and services have improved in quality, and so will obviously be more expensive.
RPI
Similar to CPI BUT
-Includes housing costs such as mortgage and interest payments
- excludes top 4% of income earners and low income pensioners as they are not average households
Causes of inflation
Demand pull
Cost push
Demand pull
Prices in a market are determined by demand and supply and a shift in either will cause price to change. Inflation can therefore be caused by an increase in aggregate demand (AD), total demand for goods and services in the economy.
Cost push
- Whilst an increase in aggregate demand can push prices up, a decrease in aggregate supply may also push prices up.
- When businesses find their costs have risen, they will put up prices to maintain their profit margins.
Internal causes of inflation
Surge in property prices
Higher wages
Rise in business taxes
Boom in money suppy
External causes of inflation
Increase in world oil/gas prices
Inflation in global commodity prices
High inflation in other questions
Effects of inflation on consumers
Less to spend
People in debt are able to pay it off at a lower value
Fall in standards of living
The money people have saved is now worthless
Inflation effects on firms
British goods will be more expensive so firms become less competitive as its harder to export goods
Inflation is difficult to predict so can’t plan for the future
