Inflation Flashcards
What is inflation
The sustained increase in the cost of living/fall in the purchasing power of money
What are the 2 measures of inflation
Consumer price index and retail price index
What is CPI
A measure of the change in price of a bundle of goods at different points in time, the goods are chosen and their prices are measured by the ONS monthly.
What is CPIH
It’s CPI but including the costs of housing such as rent and council tax
What is RPI
Retail Price Index - shows the change in value of goods and services as well as Housing related costs. It also excludes pensioner, state support and highest income households.
What is RPIX
RPIX is the RPI excluding house prices
What is weighting when calculating inflation
The weight of an item shows its relative importance to households and its share of total compensation for households
What is deflation
When inflation is negative
What is disinflation
When inflation is positive but falling
What are some of the causes of inflation
Cost push and demand pull
What is cost push inflation
When firms react to rising costs of production and increase prices shifting supply left to protect their profit margins
What is demand pull inflation
When excessive demand moves AD aggressively to the right
What is money supply
The amount of money there is in the economy
What is the formula for inflation
MV = PT
M = money supply
V = velocity (fixed)
P = inflation
T = transactions of output (fixed)
What are some of the effects of inflation
- Lower disposable income
- Value of money falling
- Consumers may panic buy before inflation
- Firms may pass on costs to consumers
- Changes in exchange rates
- Wage price spiral
What is an index
A number that measures changes in data with comparison to the base year
