Theme 2: Inflation Flashcards
Inflation
A persistent rise in the general price level and a fall in the purchasing power of money
Deflation
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
Disinflation
Disinflation describes a fall in the inflation rate
whilst still positive.
This means that prices are still rising just less quickly
Inflation Rate
The percentage increase in the general price level, usually measured as a yearly comparison
Inflation Target
The UK inflation target is 2%
+ or - 1%
according to the CPI measure of inflation
CPI
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
RPI
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
Menu Costs
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
Shoe leather costs
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
Cost push inflation
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
Demand Pull inflation
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
Quantity Theory of Money
This theory proposes a positive relationship between changes in the money supply and the long 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 of products and services
Index
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
Price Survey
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
Representative basket of goods and services
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
