Inflation Flashcards
Inflation definition
The rate of change in the average price level
overtime.
Deflation meaning
the decrease in the general price level of goods and services
Disinflation meaning
a slowdown in the rate of increase of the general price level of goods and service/inflation
What measure does the government prefer
CPI
Disadvantage of using CPI
- Excludes mortgage payments and interest
- Will be inaccurate for the ‘non-typical’ household
- Does not recognise improvements in the quality of goods and services over time
How does the basket of goods and services work
designed to represent typical purchases of consumers throughout the UK (700 items)
Different items are weighted according to their relative
importance in terms of how much their price changes
impact upon consumers
Limitation of RPI
Excludes all households in top 4% of incomes
Why would CPI be better than RPI
Covers a broader range of the population
How many households are the living costs and food survey sent to
6000 households
What does it mean if CPI is higher in UK than another country
UK is less price competitive
What is RPI and CPI used to determine
Increase or decrease in welfare benefits
What is the effect of inflation on workers
High inflation - higher costs of living
If inflation is caused by rising demand and falling unemployment - firms will increase wages
What does wage increase for workers mean to firms
Less money for the cost of production
May increase money that is paid for by consumers
Could lead to cost-push inflation
What is the effect of high inflation on firms
Rise in the cost of raw materials
Firms uncertain about future costs - less investment
With increasing, inflation interest rates may increase - increasing cost of borrowing, no investment
What is the effect of high inflation to consumers
will lead to consumers purchasing goods and
services today before prices rise further in the future
confusion over which prices are good value
What is the effect of high inflation for the government
Government want to maintain CPI at 2% so interest rates may change.
Wage caps - minimum wage cant be increased
Increase in Tax
How does reduce taxation lead to demand-pull inflation
Increases disposable income
How does lower interest rate lead to demand-pull inflation
Borrowing more attractive
Savings less attractive
How does a weak exchange rate lead to demand-pull inflation
Boost export growth
How does fast growth in other countries lead to demand-pull inflation
May increase demand for UK exports
How does general rise in confidence lead to demand-pull inflation
May feed through to higher consumer spending and investment
What is cost-push lead to inflation
firms respond to rising costs of production by increasing prices to protect profit margins
How do higher wages lead to cost-push inflation
if prices are rising, workers will demand higher wages
Leads to a wage-price spiral
How do higher raw material costs lead to cost-push inflation
Raw materials become more scarce but in greater demand
How do higher taxes lead to cost-push inflation
the government may impose higher taxes on firms; for example, corporation tax
How do natural disasters lead to cost-push inflation
May permanently or temporarily reduce raw materials
How do higher import prices lead to cost-push inflation
The weakened export rate may lead to a higher cost of production
Money supply meaning
the measure of the amount or the stock of money in the economy
How can growth in the money supply lead to inflation
Increasing the money supply faster than the growth in real output
more money chasing the same number of goods
Prices of these goods expected to increase
