3.4 Price stability

• What is price stability?

  Constant general price level over time
• What does inflation signify?

  A sustained rise in general price level
• What is the government target for inflation?

  2%
• What does the cost of living refer to?

  Price level of goods and services for families
• How does inflation affect the value of money?

  It erodes the purchasing power of money
• What is disinflation?

  Slower price increases due to lower interest rates
• What is deflation?

  Falling general price level
• What is nominal value?

  Value in monetary terms
• What is real value?

  Value that accounts for inflation
• How is inflation measured?

  Using the Consumer Price Index (CPI)
• What items have been added to CPI calculations?

  • Air fryers
  • Vinyl music
  • Rice cakes
  • Edible fungus/mushrooms
  • Gluten-free bread
• What items have been removed from CPI calculations?

  • Hand sanitiser
  • Saga beds
  • Hot rotisserie cooked chicken
  • Bakeware
• What is demand-pull inflation?

  Increased demand leads to higher prices
• What causes demand-pull inflation?

  Consumers have more purchasing power
• What is cost-push inflation?

  Higher raw material prices reduce supply
• What are the causes of cost-push inflation?

  • Wages (cost of labour)
  • Raw materials
  • Rent
  • Fuel
  • Business rates
  • Loan interest
• What are the aggregate inflation effects on consumers, firms, and government?

  • Loss of international competitiveness
  • Menu costs
  • Shoe leather costs
  • Uncertainty
  • Unemployment
  • Fall in value of savings
  • Fall in real disposable income
  • Wage price spiral
  • Confidence
• What are the consequences of inflation for producers?

  • More elasticity regarding wages
  • Menu costs
  • Labour market conflicts
  • Unemployment
  • Lack of business confidence
  • Losses as creditors
• What are the consequences of inflation for government?

  • Gains as debtor
  • Increased welfare payments
  • Major employer spending
  • Rise in tax revenue (e.g., VAT)
  • Policies to combat inflation
• What are the consequences of inflation for consumers?

  • Gains as debtors
  • Loss of consumer confidence
  • Shoe leather costs
  • Potential fall in real incomes
  • Income redistribution issues