Inflation and income inequality

• Deflation means prices are falling
• Disinflation means the rate of inflation is slowing down
• Disinflation still involves inflation, but at a decreasing rate
• A basket of goods for measuring inflation includes items like food, housing, transportation, and more
• The weightings of items change as spending habits and consumer preferences evolve
• Individual spending patterns can differ due to personal needs, lifestyle, and income levels
• Biases displayed: Substitution bias and budget constraint bias
• Groups worse off in moderate to high inflation: Fixed-income earners, savers, creditors
• Demand-pull inflation is linked to the business cycle
• Falling real GDP is often associated with cost-push inflation
• Right-wing governments might tackle cost-push inflation by decontrolling markets and reducing taxes
• Left-wing governments might reduce VAT to address inflation to alleviate the burden on consumers
• Policies to reduce demand-pull inflation may be unpopular due to potential austerity measures or reduced government spending
• Central bank independence ensures monetary policy decisions are based on economic considerations rather than political pressures
• Equity is fairness and justice, while equality is equal distribution
• Income inequality is measured using indices like the Gini coefficient
• Higher pay can result from higher demand for skills or scarcity of qualified workers
• Firms with market power can increase prices and lower wages due to reduced competition
• Pay differences can arise due to experience, education, or negotiation skills (justifiable), or discrimination (non-justifiable)
• Inheritance can impact future earnings through access to education, resources, and social networks
• A Gini coefficient of 0.6 suggests high income inequality
• Gini coefficient: close to 0 is equal income, close to one is unequal income
• Income tax can be adjusted by introducing progressive tax rates
• Government can adjust VAT/sales tax to exempt essential items or introduce progressive taxation
• Government services like education, healthcare, and social welfare can moderate income inequality
• Equal income and equitable income

  • Everyone earns the same income: Extreme Communism.
  • Equitable distribution of income: A fair distribution of income.
  • Income gaps not too wide and stable: Income equality.
• • What is deflation?
  • Decrease in the price level of an economy over time.
• • What is disinflation?
  • A falling rate of inflation (price level is still rising, but more slowly)
• A price index is calculated by recording the prices of items in a selected basket of goods popular with the public, which are then compared over a year to compute inflation rates.
• Prices of items in a chosen basket of popular goods are recorded and compared over a year to calculate a price index and inflation rates.
• Household spending changes due to shifting tastes, economy, climate, war, new products, and technology, we make adjustments in basket items and weightings.
• Outlet bias: when faced with higher prices, consumers will switch to a lower-priced outlet
• substitution bias: when certain items become more expensive, consumers switch to a cheaper alternative
• New goods bias: New products may not be quickly reflected in the basket of goods and services.
• The rate of inflation can vary across a country
• Consequences of inflation (Losers)

  • firms: have to keep changing prices of lists/menus
  • Savers: purchasing power of their spending will fall, consumer confidence falls, business confidence falls
  • retired
  • people with fixed income
  • students
  • low paid
  • exporters
• Winners of inflation

  • People with debt
  • People with assets
  • Workers with index linked salaries
  • Importers
  • spenders
• Causes of inflation:

  • Cost/push - Rising production costs, like energy, force firms to raise prices, leading to cost-push inflation, especially when the domestic currency collapses, making imports pricier.
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  • Demand/pull - during a boom, demand outpaces supply, increased consumer confidence and spending, = scarcities and higher prices
• Solutions to cost/pull --> do nothing, fixed exchange rate, wage caps, restricting trade union power, cutting sales tax
• Solutions to demand/pull --> increase taxes, reduce government spending on public services, increase interest rates, reduce money supply