INFLATION 2.1.2

• What is inflation?

  A sustained increase in average price level
• How does inflation affect the value of money?

  It decreases the value of money over time
• What is deflation?

  A decrease in the average price level
• What is disinflation?

  A decrease in the rate of inflation
• What does CPI stand for?

  Consumer Price Index
• What is the purpose of the CPI?

  It measures inflation officially for the government
• What does CPIH include that CPI does not?

  Owner Occupied Housing Costs
• What is RPI?

  Retail Price Index
• How does the Bank of England use the rate of inflation?

  To decide interest rates
• How does the government use the rate of inflation?

  To decide pensions and benefit changes
• How do businesses use the rate of inflation?

  To decide prices and wage rates
• How does inflation affect exchange rates?

  It influences the exchange rates between currencies
• What is the first step in calculating the rate of inflation in the UK?

  The government chooses a basket of goods
• What types of items are included in the basket for inflation calculation?

  700 goods and services people buy
• How often can the items in the inflation basket change?

  They can change to reflect purchasing habits
• What is the purpose of weighting items in the inflation basket?

  To reflect consumer spending on each item
• Why do petrol and housing have higher weightings?

  Consumers spend more on these items
• What do researchers do in Step 3 of calculating inflation?

  Record prices of each good across the UK
• What is accounted for in Step 4 of calculating inflation?

  Improvements in quality and reductions in quantity
• What does the Office for National Statistics do in Step 5?

  Collates prices and calculates averages
• What does the ONS do in Step 6?

  Calculates a weighted average and converts it
• What does inflation not mean for all prices?

  Not all prices increase
• What is the limitation of CPI regarding individual effects?

  It measures an average, affecting individuals differently
• Why might CPI not accurately reflect quality changes?

  Attempts to account for quality may be inaccurate
• What regional differences does CPI not account for?

  Price differences in regions like London
• What do many believe about CPI and housing costs?

  They do not account for housing costs accurately
• What is the process of constructing an index?

  1. Choose a base period for comparison
  2. Assign a value of 100 to the base period
  3. Divide other values by the base period value
• What does an index help to observe?

  Trends, patterns, and comparisons over time
• What does an index value below 100 indicate?

  A drop in Real GDP compared to the base
• How is inflation calculated over a 12-month period?

  By working out the % change using an index

  
• What was the CPIH inflation rate for September 2021?

  2.9%
• What is the formula for calculating inflation using index values?

  Inflation = (New Index - Old Index) / Old Index
• What is RPI's status as a measure of inflation?

  It is an older measure used in the UK
• How does CPI differ from RPI in terms of housing costs?

  CPI excludes housing costs, RPI includes them

  
• What is the target inflation rate for CPI?

  2.0% +/- 1%
• What is a cause of demand pull inflation?

  A decrease in income tax increases disposable income
• What historical event caused demand pull inflation in the UK during the 1980s?

  Income tax decreased from 60% to 40%
• What is cost push inflation?

  Higher costs lead businesses to increase prices
• What can cause higher costs leading to cost push inflation?

  Increases in wages from trade unions
• What impact does a fall in the exchange rate have on inflation?

  It increases the costs of imports