Unit 2, Inflation Flashcards
What is the government’s main aim in terms of inflation?
The government aims for low stable inflation. The current target rate of inflation for the UK is 2%. This is set and managed by the Bank of England.
What is the rate of inflation?
The percentage change in the general level of prices in a year.
What is inflation?
a rise in the general level of prices in a year.
Describe the method of calculating inflation.
-The living costs and food survey is carried out to find out what the general population is buying. 12,00 surveys are sent out with just over 50% being completed.
-They look at a ‘basket’ of 700 goods and services. This is based on what is most consumed.
-They see how the prices of these items have changed each month by looking at 180,000 prices from different retail outlets.
-Because we spend more on some items than others, the ONS weight items based on importance. For example, transport gets a high weighting whereas education gets a lower weighting.
- A base year is selected.
-The percentage change for the price of each product is calculated.
- The changes are totalled and an average is taken. This is the rate of inflation.
What is the CPI measure of inflation?
The consumer price index is the retail price index without housing costs such as mortgage interest and insurance.
What is the CPIH measure of inflation?
This is the CPI but including owner-occupier costs. e.g council tax, mortgage costs (not interest payments)
What is real income?
Real prices account for inflation.
e.g If your employer gives you 1% pay rise but prices have risen by 2%, then your real pay has fallen by 1%.
What is money/nominal income?
Money/nominal prices do not account for inflation.
What are the main causes of inflation?
Demand-pull
Cost push
Imported
When does demand-pull inflation happen and what does this mean?
This tends to happen when the economy is booming. This means firms are operating at or near capacity. Therefore, because there is excess demand for goods and services, consumers will bid-up prices. Therefore this causes inflation.
When does cost push inflation happen and what does this mean?
This happens when a firms’ costs of production rise, for example the cost of fuel or wages. In order to maintain their profit margin, firms will raise prices. Therefore, this will cause inflation.
What is imported inflation?
This is a general and sustained prices increase due to an increase in costs of imported products. This price increase concerns the price of are materials and all imported products or services used by companies in a country.
What impact does inflation have on individuals?
-It reduces an individual’s purchasing power if wages do not keep up with the rise in price.
-It erodes the value of savings as they can buy less and less of the interest rate is less than the inflation rate.
-It can affect those on lower incomes more because a small rise in the price of essential goods and services can mean that the poor cannot afford to buy these essential items.
-Inflation can cause unemployment as firms get less demand for goods and services.
What impact does inflation have on firms?
- The costs of production can rise meaning that profits will fall.
-Real profits can fall if the inflation rate is higher than the profit.
-Workers might demand pay rises so that they do not lose purchasing power=wage-price spiral.
-Exports become less competitive because UK prices are rising faster than foreign prices.
What impact does inflation have on the economy?
-Due to inflation affecting the poor more, it could cause greater inequality.
-Businesses are less likely to invest if they do not think they will make real profit.
-The UK imports more goods and exports less because we become less competitive which negatively affects the Balance of Payments.
-Higher unemployment which leads to collected and higher spending due to increased Universal Credit claimants.
