Inflation Flashcards
What is inflation?
Inflation is the rate of increase in prices over a given period of time
What is deflation?
Deflation is when prices keep going down
What is disinflation?
Disinflation refers to a slowing in the rate of inflation
Explain how CPI is calculated
The CPI is measured by looking at the change in price levels of a ‘typical basket’ of goods and services, such as food, transport and clothing, that people typically spend their money on
Give 3 limitations of CPI as a measure of inflation
- the substitution bias
- the introduction of new items
- quality changes
How often is CPI and RPI calculated?
every month
Approximately many goods and services are in the basket?
750
At approximately how many locations are price data taken?
150
How often are weightings updated?
every year
Explain the difference between CPI and RPI
- consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households
- the RPI includes some components that are not included in the CPI, such as housing components and mortgage interest payments
Which is higher, RPI or CPI?
RPI
What is CPIH?
the Consumer Prices Index including owner occupiers’ housing costs
Explain what is meant by ‘cost push’ inflation
occurs when overall prices increase due to increases in the cost of wages and raw materials
Give 3 possible causes of cost push inflation
an increase in the cost of raw materials, a rise in labor costs, or an increase in taxes
Explain what is meant by ‘demand pull’ inflation
occurs when demand for goods and services exceeds supply in the economy
Give 3 possible causes of demand pull inflation
money printing, government purchases, exchange rates, taxes, a growing economy, technology
Explain how growth in the money supply can cause inflation
If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes
Explain the effects of inflation on consumers/workers
For individuals, inflation will erode the real value of money. Real incomes will fall, as the purchasing power of incomes fall. So standard of living also falls. Inequality rises because the more skilled workers can negotiate nominal wage increases that keep pace or outstrip inflation
Explain the effect of inflation on firms
costs of materials and products increase, and it may influence costs associated with trade. employees might seek higher wages, and these higher costs are transferred to consumers through higher prices
Explain the effect of inflation on the government
High inflation can cause GDP growth to slowdown – leading to lower tax revenues & increased borrowing
Explain possible benefits of inflation
allows for stable and appropriate wage increase, meaning consumers have more money to spend and invest in
