inflation Flashcards
definition of inflation
a general and sustained rise in the average price level over a period of time
inflation rate
the percentage change in the general price level over a period of time
deflation definition
a general and sustained fall in the average price level over a period of time
disinflation
a fall in the RATE of inflation
hyperinflation
extreme or excessively high inflation
what is the macro objective for inflation
low and stable inflation/ price stability. bank of england set target as 2% inflation, aim is to keep annual CPI within 1% of this target.
what case may inflation be positive
developing economies where GDP is small, inflation may be a small trade off for economic growth
what is CPI
consumer price index. a measure of changes in the price of a representative basket of consumer goods and services arithmetic jeans
how often is cpi released
monthly
how is the data collected for the cpi
collected by the family expenditure survey, on the price of 700 goods and services from different outlets in different parts of the country.
how is the family expenditure survey used for cpi
statisticians decide which items go in the CPI based on the family expenditure surveys and update it annually. they make a shopping basket based on these.
what must happen to the items in the representative shopping basket before the data can be used for the cpi
they must be weighted. to reflect the proportion of EXPENDITURE spent on each category of item.
how to caluculate cpi
create a base hear
convert raw data into base year
multiply the weighting by each items index
sum these values and divide by 100 to get the price index for the year.
how to calculate inflation rate from index data
if comparing to the base year then percentage change is final- initial.
if comparing to a year which is not the base year then final-initial/ initial
limitations of using cpi to measure inflation
few households are average.
cpi includes categories which some people do not have. eh motoring costs are innaplicable to those who don’t own cars.
spending patterns.
changes in quality of goods
new products.
how does the uk government measure inflation
CPI
RPI- included mortgage payments so measures higher than cpi, geometric mean
how to create index data
choose base year. give it value of 100.
divide all other years by the base year. compare.
possible causes of inflation
cost push inflation or demand pull inflation
how does demand pull inflation work
boost in AD causes economic growth, which means there is too much money chasing too few goods, driving up the average price level which is inflation. could be caused by a cut in interest rates boosting C, increased money supply or higher wages boosting C.
how does cost push inflation work
when SRAS shifts in, there is economic decline, now there is less demand and les goods, but firms still have to make a profit, so average price level increases which is inflation. could be caused by devaluation, increase in indirect tax (vat)
consequences of inflation
reduced international competitiveness (reduces net trade), confusion and uncertainty (reduced C and I), high inflationary growth is followed by a recession, menu costs (price lists need changing), income redistribution (erodes the value of saving AND debt), fiscal drag (more people in high tax brackets), falling real incomes.
why is inflation not always bad
demand pull is a sign of rapid economic growth, often for developing countries inflation is the sacrifice for economic growth.
consequences of hyperinflation
loss in confidence resulting in instand spending, barter economy emerges, rapid redistribution of income.
consequences of deflation
defaltion can lead to economic stagnation and high unemployment. Encourages households to delay their spending, and firms to delay their investment. increases the real value of debt. wages are stciky downwards, so do not fall, people are fired instead causing high unemployemtn. real interest rates are always positive.
what is a deflationary spiral
prices fall, people delay their soending, so consumption falls, so AD falls again and prices fall even more. cycle repeats.
