Inflation [2.1.2] Flashcards
What is deflation?
Negative inflation, when average prices are falling over time.
What is inflation?
When the average price of goods and services is rising over a period of time.
What is disinflation?
When inflation is slowing down prices are still rising but at a slower rate.
What causes inflation?
Rising prices across the economy, If demand is more than a business can produce. Workers demanding more wages. If there is a increase in consumer spending.
What impact does inflation have?
Inflation causes the value of money to fall
Higher prices for many products
How does the Bank of England try to control inflation?
Monetary policy committee set interest rates to target away from inflation
How effective has the UK been at meeting their 2% inflation target?
Generally UK been quite effective at hitting the target in the last 30 years between the years of 1990 and 2020 apart from a few dips and peaks in inflation generally has been about 2%
What is CPI?
Government measures inflation by tracking the prices of a typical basket of goods every month.
How is CPI measured?
Consumer price index is measured by carrying out household expenditures surveys, this seeks to measure what people spend their money on, from this data staticans can create a typical basket of goods.
Each month the government officials collect 180,000 separate price quotations and around 700 product or services in the baskets.
Changes in prices are weighted according to their importance in spending.
What are the limitations of CPI as a measure of inflation?
CPI not representative of everyone - It will be inaccurate for the ‘non typical households’ like single peoples spending habits will be different from households that have children.
New products - The CPI is slow to respond to new products and services - CPI basket is changed each year but only a few items fall out or come in
Changing quality of goods and services - Although the price of a good or services may rise , this may also be accompanied by improvements in quality/ performance of the product
What are the other measures of inflation?
Consumer price index
Consumer price index housing cost (CPIH) - This is a new measure that tries to include more costs but is proving difficult to measure accurately
The retain price index (RPI) - This is an older measure of inflation.
What are the 3 causes of inflation?
Demand pull inflation
Cost push inflation
Money supply
What is demand pull and how does it cause inflation?
Demand pull inflation is caused by excess aggregate demand it is often linked to credit boom. The economy is close to full capacity.
Can be cause by falling interest rates cost of borrowing is cheaper or lower taxes.
What is cost push and how does it cause inflation?
Rising wages in the labour market. Increasing raw materials and components cost from domestic and overseas supplies. Rising imports prices due to falling exchange rate.
Also could be caused by an increase in land rent. It is then pushed onto consumers.
What is the money supply and how does this cause inflation?
If the money supply is increased this is likely to increased prices in a country this happens when a govt prints more money.
The government can do this by increase their government debt increase the size of their loans.
