Inflation Definitions

Question 1

Inflation (2)

Answer 1

A persistent rise in the general price level

and a fall in the purchasing power of money

Question 2

Deflation (3)

Answer 2

Price deflation is when the rate of inflation becomes negative

i.e the general price level is falling

and the value of money is rising

Question 3

Disinflation (3)

Answer 3

Disinflation describes a fall in the inflation rate

whilst still positive.

This means that prices are still rising just less quickly

Question 4

Inflation rate (1)

Answer 4

The percentage increase in the general price level, usually measured as a yearly comparison

Question 5

Inflation target (3)

Answer 5

The Uk inflation target is 2%

+ or - 1%

according to the CPI measure of inflation

Question 6

CPI (5)

Answer 6

The consumer price index is the official measure of inflation.

It is a price survey (expenditure and food survey) that measures the price level of a representative basket of goods and services (650 items).

Individual items are weighted to reflect importance of item in terms of consumer spending

and constructed into an index using a base year and geometric mean.

The CPI does not include housing costs within the index

Question 7

RPI (4)

Answer 7

The Retail Price Index was previously the official measure of inflation and is measured using the broadly same approach as the CPI.

The RPI includes a range of housing costs

and is constructed into an index using an arithmetic mean.

The RPI is typically higher than the CPI

Question 8

Menu costs (2)

Answer 8

Menu costs are the cost to a form resulting from changing prices required when inflation exists.

The name stems from the cost of restaurants literally printing new menus, but economist use it to refer to the costs of changing nominal prices in general

Question 9

Shoe leather costs (2)

Answer 9

Shoe leather costs refer to the opportunity cost of time and energy that people spend trying to counter-act the effects of inflation.

Such as holding less cash and having to make additional trips to the bank

Question 10

Cost push inflation (3)

Answer 10

Inflation caused by an increase in prices of inputs

For example the increasing cost of labour or raw materials

E.g the increasing price or oil

Question 11

Demand pull inflation (2)

Answer 11

Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply

For example m, demand pull inflation could be caused by increasing consumer confidence driving up consumer spending

Question 12

Quantity theory of money (2)

Answer 12

This theory proposes a positive relationship between changes in the money supply and the kong term price of goods.

It states that in increasing the amount of money in the economy will eventually lead to an equal percentage rise in the prices f products and services

Question 13

Index (3)

Answer 13

An index is a series of numbers

with a base year usually represented by the number 100

Which allows easy comparison of data against that base year

Question 14

Price survey (4)

Answer 14

The ONS survey the price of around 700 items each month

Many are measured in several places so 110,000 prices are collected in total from 20,000 shops in the Uk

With another 70,000 prices measured online

703 items and services

prices data is collected monthly

Question 15

Representative basket of goods and services (3)

Answer 15

This is a relatively fixed set of around 700 consumer goods and services, the prices of which are tracked to measure inflation

The goods in the basket are adjusted annually to account for changes in consumer habits

Items in the basket are identified using the Living Costs and Food survey