Inflation Flashcards
what is inflation
sustained rise in the price level over time
what is the inflation rate
percentage increase in the price level over a given period of time
how to calculate annual rate of inflation
percentage change in a given price index
purchasing power
amount of products a unit of currency can buy
price stability
governments inflation target (2%)
How to calculate Retail Price Index
living costs and food survey- survey of 6000 households, what people spent on (measures relative weighting of each item)
Basket of goods- measures the changes in price of 700 common goods
Consumer price index
mortgage interest payments and council tax not counted, larger sample than RPI
Limitations of RPI and CPI
RPI excludes top 4% in population
Basket of goods changes once a year
CPI doesn’t include mortgage and council tax
deflation
occurs when the inflation rate is negative
causing a general fall in the average price level of goods and services
disinflation
when the inflation rate is positive but falling
what are index numbers
allow to easily compare changes
what is demand pull inflation
excess demand- caused by boom (high spending, low interest rates)
too much money chasing too few goods
what is cost push inflation
when firms' fixed or variable costs rise so prices rise, causing: wages increase commodity prices increase pound falls increased regulation
3 small costs to businesses due to higher inflation
menu costs- costs to update prices
admin costs- could be doing something else
shoe-leather costs- time consuming
3 wider costs to businesses due to higher inflation
loss in value of money
uncertainty in the economy
fiscal drag-taxpayers put in higher tax bracket as paid more but must pay more tax
3 benefits to businesses due to higher inflation
may reflect economic growth
borrowers gain
national debt reduced
what does how harmful a period of high inflation is depend on
rate of inflation causes of inflation expectations inflation rates elsewhere economic priorities
causes of deflation
long recession excessive spare capacity technological improvements falling wages better productivity higher exchange rates
negative consequences of deflation
consumers may postpone demand debt rises in value borrowing costs rise falling asset prices lower profit margins
why deflation is good
consumers may benefit from better value prices
more jobs as competitors fight
