Inflation Flashcards
How is cpi used to measure inflation?
A basket of goods is calculated using a family expenditure survey which finds out what consumers spend their income on.
It gathers information from different areas of the country and outlets such as retail shops and corner shops.
The goods are weighted based on how much income is spent on each good and is updated anually.
What are limitations of using CPI to calculate inflation?
-Only representative of the average household (not those who maybe don’t own a car)
-Different demographics have different spending patterns.
-Housing costs only accounts for 16% of the CPI yet this varies between people.
What is alternative way to CPI of measuring inflation?
RPI - Retail price index (Higher value than CPI as it accounts for housing costs such as mortgage payments etc.)
What is the demand-pull cause of inflation?
When inflation is caused by unsustainable growth of aggregate demand, causing a pressure on resources.
-Usually occurs when resources are fully employed causing firms to raise prices.
What are the triggers for demand-pull inflation?
-A depreciation in the exchange rate: causes imports to be cheaper for foreign countries (WPIDEC), causing AD to rise.
-Lower interest rate: increases spending leading to higher AD.
-High growth in UK export markets: UK exports increase leading to AD increase.
What is the COst-push cause of inflation?
-Relating to the supply side; caused by high costs of production.
What are the triggers for cost-push inflation?
-Changes in world commodity prices: e.g. raw materials abroad causes increase in cost of production.
-Labour becomes more expensive due to increased wage demands to account for previous inflation.
-Indirect taxes increase cost of goods e.g. fuel, which could be passed onto consumers.
-Depreciation in the exchange rate: makes imports more expensive thus pushes up the price of raw materials (WPIDEC)
What are the main costs of inflation?
Decreased investment
Imports become more competitive
Shoe leather costs
Menu costs
What are shoe leather costs?
At times of rising prices, consumers and firms will become unclear about what is a reasonable price. This will lead to more ‘shopping around’ (wearing out your shoes) which in itself is a high cost.
What are menu costs?
When restaurants have to change their menus to show increased prices consistently, causing higher costs to issue new price lists.
What is Inflation?
a general rise in prices
What is deflation?
a fall in the price level
What is disinflation?
a fall in the RATE of inflation
What is anticipated inflation?
increases in price which economic actors are able to predict with accuracy
