Macro 7 - Inflation Flashcards
Inflation definition
Sustained increase in the average price level across the economy
What are sustained periods of extremely high inflation?
Hyperinflation
What is deflation?
Sustained decrease in the average price level across an economy
Why is low and stable inflation an important macroeconomic objective?
Limit high prices for Firms and Households
Limit income inequality
What is the UK government’s target inflation rate?
2% CPI
Why is the inflation target not 0?
Because inflation indicates economic growth
Why is deflation sometimes perceived as bad for an economy?
Could be an indication that the economy is slowing
Deflation leads to people waiting for prices to fall more, which leads to lower spending and low growth, which results in a deflationary cycle
Disinflation definition?
Decrease in the rate of inflation
Is -0.5% inflation rate disinflation or deflation?
Deflation
When measuring inflation, why do economists use index numbers?
Because they are easier to analyse
When measuring inflation, how are index numbers calculated?
A base period must be assigned to which the rest of the data will be compared. The base year is assigned a value of 100
When measuring inflation, after assigning a base year with a value of 100, how is the remaining data expressed?
(New value ÷ Base year value) x 100
How are measures of inflation calculated?
Using a basket of goods, where each good is given a weighting depending on the proportion of income it takes up.
Why does the changing of weights of goods happen in the CPI basket of goods?
Changes in weights reflect shifts in the spending patterns of households in the UK economy.
How is inflation measured in the UK?
Through the Consumer price index (CPI)
Why did the UK Government change the Inflation measurement to CPI?
To join the Harmonised Index of Consumer Prices (HICP) to make it easier to compare inflation levels with other countries
What are the steps to organise the basket of goods used to measure inflation?
- The top 650 goods and services consumed in the UK are chosen
- Each good is assigned a weight depending on the proportion of income they take up
What is the formula to calculate the rate of inflation using index numbers?
((New price level - Old price level) / Old price level ) x 100
For example, if prices on average in the economy were 5.70 GBP in 2014 and rose to 6 GBP in 2015, then the index formula to calculate inflation can be used:
6/5.7 x 100 = 105.3
= 5.3% Inflation rate
The price index for 2016 is 105, and the price index for 2017 is 110, how is the rate of inflation calculated?
(110 - 105 / 105 ) x 100 = 4.8%
What are the 2 ways of measuring inflation?
Retail price index (RPI)
Consumer price index (CPI)
What does CPI exclude from it’s data?
mortgage interest payments, rent and council tax
Does interest rates affect RPI?
Yes, because it includes mortgage interest payments
What households does RPI exclude?
highest income households
