inflation

• inflation

  the rate of increase in prices for goods and services

  a sustained general rise in prices which results in a fall in the value of money
• rate of inflation

  change in average prices in an economy over a given period of time
• deflation

  a sustained period when the general price level for goods and services is falling
• measurement of inflation

  consumer price index (CPI)

  retail prices index (RPI)

  looks at price of hundreds of things we commonly spend money on and track how these prices have changed over time
• difference between RPI and CPI

  RPI includes mortgage interest payments whereas CPI does not

  calculate inflation rate using different formulas
• calculation for CPI

  geometric mean

  multiply numbers, square root answer
• calculation for RPI

  arithmetic mean

  add numbers, divide by how many numbers
• which measurement of inflation does the government use?

  CPI as it gives lower levels of inflation
• how is inflation measured?

  basket of goods

  obtain prices

  weighting of products

  determine base year to compare prices from
• problems caused by inflation

  those on benefits lose out because benefits rise slowly compared to rate of inflation

  people who are owned money lose because of fall in real value

  increases costs of production, lowers profitability and reduces future prospects for economic growth

  increased costs of production causes UK goods to be more expensive and uncompetitive. further fall in employment, problem with balance of payments
• what is very high inflation called?

  hyperinflation
• hyperinflation

  where the rate of rise in prices is so high that people start to mistrust cash as the value of the currency falls rapidly
• problems with deflation

  encourages people to postpone buying things as it will be cheaper in the future. results in lack of sales and falls in employment

  fall in demand causes fall in confidence in business to invest. puts economy in long term downward cycle
• nominal value

  take no consideration of inflation and are expressed at current prices
• real values

  adjusted for inflation. strip out effect of inflation by using constant prices. achieved through the use of indices
• how to calculate index figure

  (new figure divided by base figure) x 100