Inflation Flashcards
What is one definition of inflation
The sustained rise in average price of goods and services over a period of time
What things do we need to keep in mind for the first definition of inflation
-The prices of some goods may rise faster than the average
-Some prices may rise slowly
-some prices may even fall
What is the second definition of inflation
Inflation can be seen as the fall in the value of money
What does the second definition mean
A fixed amount of money buys less than before
The purchasing power of money has fallen
What is deflation
Average price will be falling
What does hyperinflation mean
Prices rise extremely quickly and money loses its value
What does disinflation mean
Prices are rising but at a slower speed
What is RPI
Retail price index
What’s the first survey called and how many households are surveyed
Living costs and food surveys
6000 house holds
What is the living cost and food survey used to measure
What people spend there money on and what proportion of income is spent on these items which is used to find out relative weighting of each item
What does the second survey measure
Measures changes in price if 700 of the most commonly used in goods and services
How are the items chosen and why can the items change
The items are chosen based on Living Costs and Food surveys
The items may change due to trends and tastes so the basket has to reflect what the average household might spend money on
What are the price changes multiplied by
The weighting from the first survey which is converted to an index number meaning that inflation is just percentage change
What is CPI
Consumer price index
What items are excluded from CPI
Mortgage interest payments
Council tax
Is the sample to calculate CPI smaller or larger
Larger sample
What is CPI the official measure in the Uk
Inflation so it can be used for international comparisons
Limitations of RPI
RPI excludes households in top four percent of incomes
Information of Living Costs and Food Surveys may be inaccurate
Basket of goods change once a year
Limitations of CPI
Doesn’t include mortgage interest payments or council tax
Basket of goods change once a year
What does it mean if RPI and CPI are used to help determine wages and state benefits
-Employees and trade union use them as a starting print in negotiating
-Government uses them to decide in the increase of state pension or other welfare benefits
-Some benefits are index linked so they will rise automatically
What does RPI and CPI being used to measure change in UKs international competititivenss mean
If rate of inflation measures by CPI is higher in UK than the other countries it trades with then UK goods become less price competitive
