Inflation Flashcards
Inflation
A sustained rise in general price level
Deflation
A sustained fall in general price level
Price Stability
A low and stable positive rate of inflation
1-3%
Disinflation
A fall in the rate of inflation
Current country examples - (China, Turkey, UK, US)
China - 0.1% due to falling fresh food prices
Turkey - 42.12% due to Turkish Lira crash in 2018
UK - 2.5% and has been falling steadily since 2022
US - 2.9% and has constantly decreased due to falling gas prices
Consumer price index (CPI)
A measure of the average change over time in the prices paid by consumers for a representative basket of consumer goods and services
Measures the average household cost of living
Benefits of CPI
Gives a realistic indication of consumer behaviour
Provides a better picture of spending patterns in the UK
More comparable measure of inflation internationally and represents internal best practice
Limitations of CPI
Changes in quality of goods being priced
Special offers not considered
Changes in expenditure
Composition of the basket of goods - this changes so isn’t like for like
Average household doesn’t exist
Not all regions within a country experience identical price changes
Potential for sampling error
Retail price index (RPI)
The ‘headline rate of inflation’
RPI-X
Underlying rate of inflation
RPI inflation but excludes mortgage interest payments
Allows policy makers to view inflation rates without distortion of changes in house prices
RPI-Y
Inflation excluding mortgage interest payments and indirect taxes
VAT rates rarely change, but taxes on alcohol, tobacco and fuels may distort index figures
How CPI and RPI are measured
Weights - goods/services included are chosen and weighted on basis of spending patterns of UK households from the family expenditure survey
Prices - index measures price movement of 700 goods and services in 150 areas with a monthly price survey calculating 180,000 prices
Prices are multiplied by their weights to calculate RPI
Indexed - all index numbers refer to base number of 100
Differences between CPI and RPI
CPI excludes some items included in RPI-X (such as council tax, mortgage interest payments, buildings insurance)
CPI includes charges for financial services which the RPI doesn’t
CPI covers all private households, whereas RPI-X excludes the top 4% by income and pensioner households who derive 75%+ of income from state benefits
CPI includes residents of institutional households like student hostels, and foreign visitors to the UK
Producer price index (PPI)
PPI measures change in prices of goods bought / sold by UK manufacturers
Output price indices measure change in prices of goods produced by UK manufacturers
Input price indices measure change in prices of materials/fuels bought by UK manufacturers for processing and day-to-day operations
Demand pull inflation
Occurs when demand for goods and services exceeds the available supply of those goods and services in the economy
Demand pull inflation chains of reasoning
Depreciation of exchange rate → WPIDEC → exports increase, imports decrease → AD increases so PL increases → cost push inflation due to expensive imports
