2.1.2- Inflation

• What is the difference between Inflation, Deflation and disinflation?


  Inflation: increase in average price level of goods and services in an economy

  Deflation: is the decrease in price level in an economy

  disinflation: the slowing down of the rate of inflation in an economy
• What is CPI?


  (consumer Price Index) measured by the prices of a “basket” (represents everyday items) of goods and services purchased by households. Each item has an assigned weight based on its importance e.g food>games. These prices are checked per month and compared over a base period in percentage
• What are the limitations of CPI?


  -it measures a typical household but not specific subgroups like low income families

  -not fully representative as it excludes housing costs like rent

  -price different quality of goods cost more.
• What is RPI?


  RPI stands for the Retail Price Index, which is a primary measure of inflation in the UK. Includes housing costs, mortgages etc. But replaced by CPI
• What are the 3 main causes of inflation?

  Demand-pull, cost-push, and Growth in money supply
• What is demand pull inflation?and what are the causes 


  Occurs when the demand for goods and services exceeds the economy’s productive capacity

  Causes:increase in customer spending due to increase in wages, low interest rates
• What is cost- push inflation? and what are the causes ?

  results from rising product costs which leads to businesses raising prices to maintain margins

  Causes:higher wages, increase prices of raw materials
• What is growth in the money supply? and what are the causes?


  occurs when there is an increase in the amount of money circulating in the economy.

  Causes: central banks lowering interest rates, increase in bank lending
• Why is deflation bad?


  reduces costumer spending- expecting prices to fall further leading to decline in demand. Higher unemployment businesses may cace reduce profability so cuts costs, Lower investments-firms may delay investment due to expectations in lower prices in the further.
• explain the effects inflation has on consumers ?

  Pros:fixed rate of depts

  coms: reduce ability to purchase goods
• Explain the effects inflation has on firms?


  pros: can raise prices so increase profitability

  Cons: increases cost of raw materials
• explain the effects inflation has on the governments ?


  pros: can hurt economic stability but can help reduce the real value of public debt

  cons: increase tax revenue
• explain the effects inflation has on workers ?


  pros: wage negotiation

  cons: can erode real wages so reducing purchasing power