Inflation

• What is inflation?

  A sustained general rise in the prices across an economy.
• What is deflation?

  A sustained general fall in prices across an economy.
• What is disinflation?

  A fall in the rate of inflation.
• What is the concept of the basket?

  In principle, the basket should contain consumer goods and services purchased by households and the price measured in every shop or outlet that supplies. In practice, the consumer price indices are calculated by collecting a sample of prices for a selection of representative goods and services in a range of UK retail locations including the internet.
• How is price level measured?

  Price level is measured using various price indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). So if the price index were 100 today and 110 in one year‘s time, then the rate of inflation would be 10%.
• What is the formula for calculating inflation?

  (change/previous)x100
• What is the weight of a good or service?

  The value or importance on the good or service.
• What should the proportion of total spend always add up to?

  100%
• What does CPI stand for?

  Consumer Price Index
• What does RPI stand for?

  Retail Price Index
• What does RPIX stand for?

  Retail Price Index excluding mortgage interest payments
• What does RPIY stand for?

  RPIX minus changes in indirect taxes
• What is the definition of CPI?

  Measure of inflation that tracks the average change in prices of goods and services purchased by households.
• What is the definition of RPI?

  A measure of inflation in the UK.
• What is the definition of RPIX?

  RPI minus X refers to the form of price cap regulation developed in the U.K. and utilized in many counties. The price automatically adjusts for the previous year's retail price inflation (RPI) and for expected efficiency improvements (X) during the time period the price adjustment formula is in place.
• What is the definition of RPIY?

  RPIY stands for Retail Price Index for Industrial Workers.
• What are the 3 causes or inflation?

  . Demand-pull

  . Cost-push

  . Growth of the money supply
• What is demand-pull inflation caused by?

  excessive demand in the economy for goods and services. There is too much money chasing too few goods and services.
• What’s a list of some causes of demand-pull inflation?

  • Reduced taxation
  • Lower interest rates
  • A general rise in consumer spending
  • Improved availability of credit
  • A weak exchange rate
  • Fast growth in other countries
  • General rise in confidence/expectations of future growth
  • certainty
• Why is reduced taxation a cause of demand-pull inflation?

  Reduced taxation - Increases disposable income.
• Why is lower interest rates a cause of demand-pull inflation?

  • Lower interest rates - Makes borrowing more attractive and saving less rewarding.
• Why is a general rise in consumer spending a cause of demand-pull inflation?

  • A general rise in consumer spending - Perhaps from higher incomes and consumer confidence.
• Why is improved availability of credit a cause of demand-pull inflation?

  • Improved availability of credit - Banks/buildings societies widen the availability of credit or make it more affordable.
• Why is a weak exchange rate a cause of demand-pull inflation?

  • A weak exchange rate - will boost export growth
• Why is fast growth in other countries a cause of demand-pull inflation?

  • Fast growth in other countries - may increase demand for uk imports
• Why is a general rise in confidence/expectations of future growth a cause of demand-pull inflation?

  • General rise in confidence/expectations of future growth - may feed through into higher consumer spending and investment.
• Why is certainty a cause of demand-pull inflation?

  • Certainty - links to confidence and assists consumers and firms in their spending and investment decisions.
• What is cost-push inflation caused by?

  This occurs when firms respond to rising costs of production by increasing prices. Firms will typically do this to protect profit margins. That said, firms may be able to absorb some increases in their costs of production, but they will not be able to do this indefinitely, and so pass costs onto the consumer in the form of higher prices.
• What are the causes of cost-push inflation?

  • wage increases
  • higher raw material costs
  • higher import prices
  • natural disasters
• Why is wage increases a cause of cost-push inflation?

  • For many firms, wages is their largest single cost of production.
  • It is likely that if prices are rising, workers will demand higher wages in order to maintain their ‘real‘ incomes.
  • If these higher wage costs are reflected in higher prices, then workers will continue to demand higher wages, leading to a wage-price spiral.
• Why is higher raw material costs a cause of cost-push inflation?

  As primary raw materials become more scarce and in even greater demand, raw materials and associated components may rise in price.
• Why is higher taxes a cause of cost-push inflation?

  The government may impose higher taxes on firms, for example, corporation tax, national insurance or taxes on waste disposal.
• Why are natural disasters a cause of cost-push inflation?

  May temporarily or permanently reduce the supply of raw materials or disrupt the supply chain, adding to a firm’s costs.
• What is growth of the money supply?

  • The money supply is a measure of the amount of stock of money in the economy.
  • There are different definitions
  • As the economy grows every year it is likely that we will need a greater supply of money due to increased transactions.
• How do changes in the world commodity prices affect domestic inflation?

  • Commodities such as oil and food make up a large proportion of UK imports.
  • This means that they have a significant impact on the price level.
  • Many of the commodities that are brought in the UK are price inelastic products.
  • Therefore, a rise in the world price of commodities will feed through to UK inflations.
• How do changes in other economies affect inflation in the UK?

  • The UK is impacted in a number of ways.
  • Emerging markets are creating a growing demand for goods and services globally. This has led to demand-pull inflation.
  • These same markets are increasing productive capacity which has led to lower cost products feed through into lower prices e.g. China.
  • The economic performance of our major trading partners such as the EU and the US will impact on demand for UK products.
• What are the consequences of inflation?

  • Over time, the price of goods and services tends to rise.
  • It is important to understand why is this the case, and what impacts this may have.
  • If wages and earnings remain constant, then as prices rise, consumers are worse off in real terms, as their disposable income will buy them less goods and services than previously.
  • Therefore, it is said that inflation erodes the value of money.
  • Inflation is a main focus of microeconomic policy and the Bank of England has been delegated an inflation rate of 2%.
• What are the consequences of inflation on consumers?

  High inflation will lead to consumers purchasing goods and serives today before prices rise further in the future.

  Firms will pass costs to the consumer which will further fuel higher prices and increases in inflation.
• What are the consequences of inflation on firms?

  Firms will pass costs to the consumer which will further fuel higher prices and increases in inflation.
• What are the consequences of inflation on the government?

  the government have set the Bank of England a target of 2% inflation and so interest rates may change to control the price level.