Inflation S2 L25 Flashcards
Inflation
An increase in the overall level of prices
Price level
The average level of prices and the value of money
Deflation
A persistently falling price level
Inflation rate
The percentage change in the price level from the previous period
Demand-pull inflation
When the demand for G&S is higher when compared to the production capacity
Cost-pull inflation
It occurs when the cost of production increases.
A rise of inflation means …
A faster increase in prices
A fall in inflation means …
A slower increase in prices (but still an increase in the average level of prices)
Built-in Inflation
A rise in prices results in higher wages to afford the increased cost of living. Therefore, high wages result in increased cost of production, which in turn has an impact on product pricing. The circle hence continues
Unpredictable inflation or deflation is a problem because … (4 points)
- Redistributes income
- Redistributes wealth
- Lower real GDP and employment
- Diverts resources from production
Inflation rate
The annual percentage rate of increase in the average price level
CPI
Consumer price index
CPI measures
The average of the prices paid by consumers for a “fixed” basket of consumer goods and services
The ….. .. ……. ……… reports the CPI each month
The Office of National Statistics
Constructing the CPI involves 3 stages …
- Selecting the CPI basket
- Conducting a monthly price survey
- Calculating the CPI
Measuring the cost of living involves… (3)
- Find the cost of the CPI basket at base-period
- Find the cost of CPI basket at current prices
- Calculate the CPI for the current period
CPI formula
(Cost of baskets at current period/ Cost of basket at base period) x 100
CPI might overstate true inflation due to… (4)
- Quality change bias
- Commodity substation bias
- Outlet substitution bias
- New goods bias
New goods bias
New goods that weren’t available in the base year appear
Quality change bias
-Quality improvements occur every year. Part of the rise in price is payment for improved quality and not inflation
Commodity substation bias
The market basket of goods used in calculating the CPI is fixed and does not take into account consumers’ substitution away from goods whose relatives price increases
Outlet substitution bias
As the structure of retailing changes, people switch to buying from cheaper sources, but CPI doesn’t take this into account
Hyperinflation
Very high, typically accelerating inflation
Core inflation rate
CPI inflation excluding the volatile elements (food and fuel)
