Inflation Flashcards
What is inflation
A sustained increase in the average price level of an economy, over time
What does inflation do to money
Devalues it
What does inflation cause
Strikes due to wages not being able to keep up with inflation
What is the current rate of inflation
10.1%
What is the governments aim for inflation
2%
How is inflation measured
The annual percentage change in the level of prices as measured by the consumer price index
What is deflation
A sustained fall in the general price level (rate of inflation becomes negative)
What is Consumer Price Index (CPI)
Main measure of inflation for the UK
What will a inflation rate of 2% lead to
Will achieve a sustained period of low and stable inflation, this is known as price stability
What are the two main causes of inflation
Demand pull and cost push
What is demand pull
When there is excess demand
What does demand pull do
- increases demand for goods and services
- causes businesses to increase their prices
- if all businesses increase their prices, this leads to an increase in demand pull inflation
Why does demand for goods and services increase
- induviduals have more income
- seasonal
- fall in taxation
What is cost push
When costs rise
What does cost push do
- costs of production increase
- this means that businesses will see a fall in profits
- businesses will therefore increase their prices
What are the costs of inflation
Money loses its value and people loose confidence in money
Can disrupt business planning
What is a wage - price spiral
When inflation gets our of control, prices increase which leads to a higher wage demand as people try to maintain their living standards
What are the consequences of inflation
Consumers on fixed incomes loose out because their real income falls
Can cause higher unemployment in the long term - lack of competitiveness
What can the government do when inflation is too high
Increase taxes, reduces personal disposable income, decreases demand, businesses decrease prices and then decrease inflation.
What is government spending
Money provided by the government spent on public sector wages e.g. NHS workers, schools, civil seniors and building roads
How can the government help unemployment vial government spending
The government spending helps to provide jobs, this causes an increase on personal income. The demand for goods and services increases, causing an increase in business prices and overall an increase in inflation.
