Inflation

• What is deflation?

  Fall in general price level
• What is benign deflation?

  Falling prices due to technological advances
• What is malevolent deflation?

  Falling prices due to significant economic downturn
• What problems does malevolent deflation cause?

  • AD falls, consumers refrain from spending
  • Unemployment increases due to reduced spending
  • Creates a downward multiplier effect
• What is hyperinflation?

  Rapid, excessive, out of control price increases
• How do global commodity prices influence UK inflation?

  • Rising prices make imports more expensive
  • Higher import prices lead to higher UK prices
• How do exchange rates affect inflation?

  • Changes in exchange rates impact import prices
  • A weaker currency increases import costs
• How do global interest rates influence inflation?

  • Higher interest rates increase borrowing costs
  • Affects consumer spending and investment
• What are supply chain disruptions?

  • Events like factory closures or transport issues
  • Can lead to increased costs and inflation
• What is inflation?

  Sustained increase in general price level
• What is disinflation?

  Rate of inflation is falling but still positive
• What is a price index?

  An index showing price changes over time
• What does the Retail Price Index (RPI) measure?

  Changes in prices of commonly used goods
• What does the Consumer Price Index (CPI) exclude?

  Mortgage interest payments and council tax
• What is the purpose of a weighted price index?

  • Measures average prices of a typical household's basket
  • Reflects changes in consumer spending patterns
• What causes demand-pull inflation?

  Lower direct taxes and increased consumer spending
• What causes cost-push inflation?

  Increased component costs and rising labor costs
• What are the differences between demand-pull and cost-push inflation?

  Demand-Pull Inflation:

  • Caused by increased demand
  • Results from lower taxes and higher spending

  
  

  Cost-Push Inflation:

  • Caused by increased costs
  • Results from higher production costs and taxes
• How do expectations of inflation affect wage demands?

  Workers demand higher wages if inflation is expected