Inflation Flashcards
how do you calculate inflation from cpi
(CPI June 2018/CPI June 2017 ) - 1 x 100
what is inflation and what is the inflation rate this september quarter
a noticeable price increase overtime across a range of goods 0.7%
what is the CPI
a measure of changes in the price of baskets (samples) of g/s bought by Aus households
what is a basket
items classified into 11 major groups, 33 subgroups and 87 classes of expenditure
what is a weight (what is health care weighted and what are weights influenced by)
percentenage of household income/ importance ABS attaches to items for HH (5/7% healthcare)
influenced by consumers preferences and reactions to price
what is the formula for total expenditure per period
weight x price
why is the CPI not a good measure of inflation (3 points)
only shows prices in cities which is not the true cost of living
doesnt reflect consumer preferences/substitutions
doesnt account for changes in equality of goods so price tends to be overstated
what is a headline measure of inflation
the CPI is a headline measure of inflation, it is a broad measure of cost change in new purchases made by salary/wage earners
what are the 2 factors effecting headline measures
- price of agricultural commodities change each season (price falls when supply is up but rise in shortage or out of season)
- Macroeconomic events - fall in interest rates mean household spending on mortgages have fallen
what is an underlying measure of inflation and why is it better than headline
gives a more accurate picture of inlation and removes the above influences
how do you calculate underlying measures:
- trimmed mean
- weighted mean
- trimmed mean - all prices are arranged big to small and the top/bottom 15% are trimmed of
- weighted median - median of inflatino rate in CPI basket
what is demand pull inflation
too much money chasing too few goods - high demand caused by expenditure levels pulling up prices
what are 3 things that idnicate high demand (demand pull)
- high spending on construction/consumer durables
- excess money supply (growth rate money > growth rate output)
- excess labour demand (forces up wages = spending = = prices)
what is cost push inflation
rising production cost passed onto consumers through high price
what are 5 events that increase output price
- wages rise faster than worker productivity
- improts prices rises due to decreases currency
- rising energy price
- rising oil/petrol price
- natural disasters
describe output effects as a consequence of inflation
purchasing power is reduced and investment/output suffer
what are the 5 output effects
- real income falls (price + interest rates rise faster than income)
- uncertainty
- capital for labour substition (machines over ppl)
- internation comp reduces
- lack of confidence in money as a store of value
output effects - further explain uncertainty as an output effect of inlfation
savings and investment are disccouraged which reduces growth
investment is more risky as future cost and price are uncertain so rate of return is uncertain
increase capital exp risk = lower output and lower employment
output effects - further explain the reduction of international competitiveness as an output effect of inlfation
if australia’s currency inflates - demand for exports falls as price rises and improts become more competitive as price falls relative to AUS (inflation - currency depreciation)
output effects - further explain a lack of confidence in money as a store of value as an output effect of inlfation
ppl seek to reduce risk against price rise this is done through purchasing assets which is speculative activity
explain redistributive effects of inflation
inflation burden doesnt fall evenly on all sectors
who are the 4 winner of inflation
- households that can buy real assets
- skilled workers
- borrowers (build assets on borrowed funds)
- government (revenue increases
who are the 4 losers of inflation
- low income earners (welfare)
- lenders (interest rates fall)
- savers (real value falls)
- Pay as you go taxpayers
what is bracket creep
increased tax liability due to inceased cinome or inflation pushing them to higher tax brackets
