Inflation And Deflation Flashcards
Define inflation
A persistent rise in the price level and the associated fall in the value of money. So one can buy less with the same amount of money
When would inflation not be a problem for a business?
When wages are about the same rate or higher. A low constant rate of price increase serves to maintain demand by increasing profits and allowing earnings to rise steadily.
When does inflation become a problem?
When it is high, rapidly rising or doing both.
How is inflation measured?
Consumer price index (CPI)
What is CPI
measures the average monthly change in the prices of goods and services held by the uk.
What is CPI used for
The government uses this to set targets for inflation in the future.
Deflation definition
The rate of decrease of thr general price level and the corresponding rise in the value of money.
What can deflation create
A burden of debt.
What is inflation key to
Maintaining price competition
Outline how inflation effects business decisions
Has implications for cost and pricing strategy.
Business may have to increase own prices to maintain profit margins
Can cause a fall in sales = decision to cut back production or seek alternative markets.
PIE - can help borrowing/investment in non current assets.
Effects of inflation on conusmers.
Money loses value and people lose confidence in money as the value of savings is reduced
Price increase lead to higher wage demands to maintain living standards.
Consumers on fixed incomes lose out because their real incomes fall.
Why is a little bit of inflation good for businesses
Industry wide price rises enable revenues to grow
Growing revenues + constant gross profit margin = higher gross profit.
Makes using debt as a source of finance cheaper in real terms
High inflation business effects
Costs are rising, businesses may not be able to pass them onto customers.
Inflation can disrupt business planning and lead to lower investment
Rising inflation associated with higher interest rates - reduces economic growth and can lead to a recession
