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Inflation/Deflation - Coggle Diagram
Inflation/Deflation
LIMITATIONS OF CPI
not fully representative - e.g. 14% of CPI is devoted to motoring costs, not applicable for non-car owners.
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housing costs - CPI measures changes in cost of rent, property and insurance - account for 16% of index. Housing costs differ per person.
changing quality of goods and services - can rise but may be accompanied by an improvement in quality of product.
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INFLATION
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fall in inflation is not the same as a fall in prices. Only in deflation is when general price level falls.
CAUSES OF INFLATION
Demand Pull:
Excess AD
Linked to money and credit boom
Economy close to full capacity (inelastic AS)
POG (AD > potential GDP)
Cost Push:
Rising wage costs in labour market
Increasing raw material and component costs from domestic & overseas suppliers
Rising import prices due to a falling exchange rate - increase import costs.
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Internal Causes of Inflation:
Large surge in property prices
Higher wages/labour costs
Boom in credit/money supply
Rise in business taxes e.g. VAT
External Causes of Inflation:
Increase in world oil/gas prices
Global inflation in commodity prices
Depreciation of exchange rate
high inflation in other countries
Winners:
Workers with strong wage bargaining power
Debtors if real interest rates are negative
Producers if prices rise faster than costs
Losers:
Retired on fixed incomes
Lenders if real interest rates are negative
Savers if real returns are negative
Workers in low paid jobs
