Inflation/Deflation Flashcards
What is the target rate for inflation in the UK?
2%
What is the acceptable range of inflation?
1-3%
Who manages inflation in the UK?
The Bank of England
What are the measures of inflation?
CPI
RPI
What is CPI?
Consumer Price Index
How to calculate inflation with CPI?
Select a base year
A food and expenditure survey of 40,000 households
As a result, a basket of goods and services is created (700 of the most popular)
Each good receives a weighting of importance
Prices of these goods are tracked
Equation of CPI
Weight*Price change
What are the limitations of CPI?
Not fully representing
Slow to respond to change
Changes in Quality
Doesn’t include all costs
What’s inflation?
A sustained rise in the general price level or a fall in purchasing power.
What’s deflation?
A sustained fall in the general price level or a rise in purchasing power.
What’s disinflation?
A fall in rate of inflation while inflation is still positive
What is the inflation rate?
The percentage rise in price level over a year
What are the types of inflation?
Cost - Push Inflation
Demand-Pull Inflation
What is Cost-push inflation?
A rise in average prices caused by increased in firms’ costs.
What is Demand - Pull inflation?
When AD exceeds AS, there is a rise in prices as there is too much money chasing so few goods
What are the causes of Cost - Push Inflation?
Imported raw products; inflation in exporting country or fall in the value of importing country currency.
Increased Labour costs - TU action or MW increases
A rise in Indirect Tax rates - eg. VAT
Wage price spiral - workers demand wages inline with inflation
What are examples of Cost-Push inflation?
Increasing world oil prices
Depreciating exchange rates
What are examples of Demand - Pull inflation?
Rising property prices
Rapid expansion of credit from banks
What are the consequences of Inflation?
To consumers
Reduced purchasing power (Unless nominal wage rises faster)
Savings lose their value
Purchasing of Expensive products
Distribution of wealth from savers to borrowers.
Increased cost of variable interest borrowing - eg mortgages
What are the consequences of Inflation?
To firms
Rising costs
Investment falls as business confidence falls
Increased profitablity
What are the consequences of Inflation?
To the economy
TU unrest
Fiscal drag
Rising Interest rates - increased cost of borrowing leading to less investment and growth
Less consumption
International competitiveness falls
What’s hyperinflation?
Inflation exceeds 1000%
What are problems related to inflation?
Menu costs
Shoe - leather costs
What is deflation?
general decline in prices for goods and services
What are types of deflation?
Benign
Malevont
What is Benign (good) deflation?
An increase in aggregate supply, primarily as a result of technological advancement.
What is malevont (good) deflation?
Fall in prices due to a significant fall in economic activity
What are examples of deflation?
Tech Sector
Agricultural Sector
