Inflation
Measuring Inflation
Benefits of low inflation
Costs of deflation
Costs Of High Inflation
Price levels are put in Index Form
Measured using Consumer Price Index
Measured using Retail Price Index
Prices of a representative range of goods and services are recorded
Basket is calculated from the living costs and food survey
few households asked to record monthly expenditure
Calculate average household spends
surveyors are sent each month to record prices
prices recorded in different Areas and different retailers
results are averaged out put into index form
calculated by comparing the price of buying the basket of goods with a starting period, called the base year
Growth and Unemployment
Firms reduce investments because don't want risk in unstable economic climate
Consumers reduce expenditure for own interest
Disrupts pattern of spending in the economy
Lower Levels of output/spending
Lower economic growth/falling GDP leading to higher Unemployment
Competitiveness
high inflation can lead to a balance of payment effect
inflation rises faster in uk than other countries
Exports less compettitive
Imports are more Competitive
Result in loss of jobs and lower growth
Psychological and Political Costs
Price increases are deeply unpopular
people feel way off even if income rise is larger than rise in inflation rate
High rates of inflation can disturb distribution of income and wealth
Affect existing social order
caused by the lack of demand in the economy
consumer confidence tends to be low
Feeds into lack of business confidence and lower investment
Interest rates tend to be very low then real cost of borrowing is higher
Asset Values worth less in the future than when it was bought
Low inflation contributes towards economic stability
encourages saving, investment, economic growth, and helps maintain international competitiveness
Gives policy makers room to adjust the economy
Makes it easier for those borrowing to repay their finances