Inflation

Question 1

Consumer price index (CPI)

Answer 1

The CPI is the UK government’s preferred measure of inflation, it measures changes in the average cost of living for a representative household and is a weighted price index.

Question 2

Cost push inflation

Answer 2

Inflation caused by rising costs of production either domestically or from importing raw materials at higher prices due to exchange rate depreciation.

Question 3

CPIH inflation

Answer 3

CPIH is a measure of UK inflation introduced in 2017 that includes owner occupiers’ housing costs). These are the costs of housing services associated with owning, maintaining and living in one’s own home.

Question 4

Creeping inflation

Answer 4

Small rises in the general price level over a long period, low positive rate of inflation.

Question 5

Deflation

Answer 5

A persistent fall in the general price level of goods and services shown by a negative rate of inflation.

Question 6

Demand pull inflation

Answer 6

Caused by an excess of AD over AS. “Too much money chasing too few goods”.

Question 7

Disinflation

Answer 7

A fall in the rate of inflation but not sufficient to bring about deflation. Prices are still rising but at a slower rate, for example a drop in the annual inflation rate from 6% to 2%.

Question 8

Inflation

Answer 8

A sustained increase in the general price level for goods and services. PERSISTANT AND GENERAL

Question 9

Inflation excpectations

Answer 9

The rate of increase of consumer prices expected by consumers.
Expectations can then influence spending and saving decisions and also wage bargaining.

Question 10

Inflation target

Answer 10

The Bank of England has a CPI inflation target, which is currently 2 per cent.

Question 11

Inflationary pressures

Answer 11

Demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.

Question 12

Money supply

Answer 12

The entire quantity of a country’s commercial bills, coins, loans and credit.

Question 13

Price stability

Answer 13

Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses.

Question 14

Purchasing power

Answer 14

The buying power of a unit of currency. It is inversely related to the rate of inflation.

Question 15

Relative deflation

Answer 15

An economy with an inflation rate which is lower than comparable economies. Over time, a low relative rate of inflation can lead to improved price competitiveness.

Question 16

Stagflation

Answer 16

A combination of slow growth and rising inflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent.

Question 17

Wage price spiral

Answer 17

Where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation.

Question 18

Weights

Answer 18

Weights are used when calculating a weighted consumer price index. In the UK for example, the weights used are taken from the spending patterns revealed by data from the Family Expenditure Survey. Heavily weighted items such as transport costs, fuel bills and prices of foodstuffs have a bigger impact on the overall measure of CPI inflation.