Inflation
inflation is defined as a persistent increase in the general price level over a given period of a time
measures of inflation
CPI ( common price index)
RPI (Retail price index)
inflation is an indicator of the strength of the economy as unexpected inflation would mean goods amd services are becoming unaffordable as the purchasing power falls
how rate of inflation is measured in the uk
the ONS calculates the rate by collecting prices on a basket of around 700. Each item is weighted in the basket to the % of household income spent on them.The basket is updated once a year to reflect changing consumer consumption behavior
index numbers are used to measure inflation.To first calculate this, you need a base which is commonly a year which everything else is compared to.To calculat an inflation rate we use the formula (new value/base year) times 100
deviations
deflation
disinflation
persistent decrease in the general price level over a period of time.Price goes down.
decrease in the rate of increases of prices so prices are still going up
causes of inflation
Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. Cost-push inflation is determined by supply-side factors, such as higher wages and higher oil prices.
demand pull inflation is caused by increases in aggregate demand exceeding aggregate supply.Increase in AD leads to the general price level rising because supply cant keep up with the increase of demand
causes of cost-push inflation:-national minimum wage increases-trade union wage increases -increase in world commodity prices -external supply side shocks -rise in indirect taxes -rise in corporation tax -falling productivity
causes of demand-pull inflation: -exchange rate depreciation -rising demand spirits -excessive borrowing -global economy experiencing faster growth in incomes and buying a lot of goods from the uk, casuing uk exports and AD to rise quickly
consequences of inflation
impact on individuals: -inflation will erode the real value of money. Real incomes fall and purchasing power falls so standard of living falls -inequality rises because more skilled workers negotiate nominal wage incrwases that can keep pace or outstrip inflation -cash loses value more quickly meaning more trips to the bank -
impact on savers and borrowers: -savers lose out because the real interest rate falls as inflation rises -borrowers gain as real interest rate falls -indebtedness falls because the real value of debt falls as inflation erodes the value of repayments
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impact on firms: -business uncertainty -falling international competitiveness as a countrys exports will be less internationally competitive
expectation problem
if inflation expectations rise, people tend to spend now to avoid the future higher prices. This can cause demand to rise causing prices to rise even further which furthers inflation.
wage-price spiral problem
As inflation rises, people start to expect higher inflation which leads to them asking for higher nominal wage rises to keep pace with the rising cost of goods in shops.Firms may grant this but as costs rise they may have to pass it on to consumers with higher prices which causes demand for higher wages again
CPI is used for: -updating pensions,wages and benefits -understanind of inslation on forming budgets
limitations: -only used since 1996 so it can only be accurately compared to these years -some people argue that analysts overestimate inflation because they don't take into account that goods and services have improved in quality which will be more expensive
Evaluation: -will it truthfully reflect it -families will spend on different items and qualities -care must be taken to pick a representative basket -care must be taken to pick the correct the wight of items
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RPI measures the same things CPI measures but also includes the cost of mortgage payments, rent and council tax. RPI is not calculated anymore but figures are still often compared to it