Inflation Flashcards
What is deflation?
A situation in which the average level of prices is falling - this is negative inflation.
Disinflation definition
Is a decrease in the rate of inflation - a slowdown in the rate of increase of the general price level of goods and services in a nations gross domestic product over time.
What is hyperinflation?
Occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of local currency.
How does inflation affect the domestic value?
Inflation erodes the value of currency. Therefore a given stock of money will buy a smaller quantity of goods and services.
What is CPI
A measure of the changes in the prod of a representative basket of consumer goods and services. Differs from RPI methodology and coverage.
What is RPI
Retail price index includes mortgage interest payment and tends to be more volatile.
Stages in construction the RPI/CPI
- Identify what the UK public are spending their money on.
- Calculate the value of products in the basket of goods
- Weight the items in the basket according to the percentage of household income spent on each item.
What is RPI definition
Measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequent used in wage negotiations. Differs from CPI in methodology and coverage.
How are items selected for CPI?
Over 700 items
Survey
More than £400m goes in
Less than £100m goes out
Costs of inflation
- Fall in the value of money
- menu costs
- shoe leather costs
- other admin costs
- inflationary noise
- random redistribution of income
- fiscal drag
- uncertainty
- inflation causing inflation
- loss of international competitiveness
Benefits of inflation
Low and stable demand-pull inflation
Money illusion
What is inflation?
A sustained rise in the general price level.
