Inflation Flashcards
Who does high inflation hit
Lower income households harder
Govt aim
2%
Inflation now
3.5%
Saving rates surged during pandemic
24%
How do firms respond to inflation
Raising prices
Improving productivity
Accepting a reduction in margins
Firms that have best data/ research on consumers
Are able to price discriminate
Many manufacturing businesses have designed products
To reduce raw materials wastage
In October 2022 what was inflation
10%
Corporate profits not workers’ wages-
This means that firms should be accepting less of a profit on tgeir goods at present and not blame everything on workers’ wanting increased wages. Direct labour is only onw cost of production. If labour costs rise by 10% it should not follow that price is increased by 10%
Concentrated oligopolistic markets
Most markets nowadays have a degree of oligopoly about them (fast food). Therefore there is a high degree of interdependence
They use their power to max prfits
Their monopolistic status allows them to make supernormal profits
Increased interest rates are helping
Banks and landlords
The philips’ curve
Embodied the view that there wws an inverse relationship between inflation and unemployment
Theoretical arguments for philips’ curve
The greater the degree of demand pressure for labour, the lower unemployment is likely to be
Excess demand for labour will cause the money wage rate to rise which will turn push up the rate of price inflation
Given that prices are set up by adding a profit mark-up on costs, the main component of which is wages, the phillips’ curve can be used to yield a theory of price inflation
What would firms rather purchase
Labour for minimum wage than technology
Region inflation
Not all regions are equal in terms of inflation
1. In some areas of tge UK drive more
2. Housing less efficient
3. Lower wages (north-east of england)
Problems with high inflation
Makes savers worse off when inflation is greater than interest rates as it reduces the value of savings
High inflation makes British good more expensive abroad leading to a fall in exports
Reduce inflation
Raise taxes
Reduce govt spending
Raisd interest rates
Encourage productivity
Deflation
The fall in the general level of prices
Deflation causes
Unemployment
Reduced consumer spending (delayed purchases)
Banks may struggle to stimulate the economy if interest rates are already low
Deflation causes
Unemployment
Reduced consumer spending (delayed purchases)
Banks may struggle to stimulate the economy if interest rates are already low
