inflation

• Hyperinflation


  Occurs when the inflation rate exceeds 50% per month
• Problems experienced in Venezuela as a result of the hyper-inflation

  • Lack of basic goods - consumers are having to queue to get the few supplies available. This has a negative impact on living standards.
  • Lower purchasing power - as prices rise, but wages don't people cannot buy as much as they used to before. This reduces living standards.
  • Crime has increased and people are afraid to leave their homes - as those people who cannot get basic goods and services turn to theft.
  • Retired people have had to return to work to supplement their income as their pensions are no longer enough to buy the basic necessities.
• Inflation


  Refers to a sustained rise in the average price level
• Inflation rate


  The percentage change in the average price level over a period of time - usually one year
• What is happening to the average price level if inflation falls from 5% to 3%?

  The rate at which the average price level is rising has slowed down, from 5% to 3% - but prices on average are still rising. This is known as DISINFLATION
• Disinflation


  The rate at which the average price level is rising has slowed down, from 5% to 3% - but prices on average are still rising
• Deflation or negative inflation


  The situation when the average price level is falling over time
• Economic indicators - inflation


  • Index numbers
  • Consumer Prices Index (CPI)
• Inflation is calculated with the use of index numbers.
• Each month the average price level is calculated and recorded as the CONSUMER PRICES INDEX (CPI).
• By finding percentage changes in the CPI we can calculate the rate of inflation.
• Index numbers


  Economists frequently use when presenting time series data. A base year is chosen and the variable concerned is given the value of 100 in the base year. The data for subsequent years is then given a number to show how the variable has changed relative to its base year.
• The table offers data on the changing costs of public and private transport over the period 1981 - 1995.
• The year 1981 was chosen as the base - as all index numbers are 100.
• We cannot tell from the data what the price for rail fares was in 1981. Indices describe percentage changes and not absolute figures.
• In reality, a weighted index would give a truer reflection of how people are affected by price changes. For example, a doubling of the price of bread would be much more significant for a household than a doubling in the price of light bulbs.
• The more weight we give to an item the bigger the effect its price change will have on the inflation rate. If we give most weight to the item that has changed least in price, the inflation rate will be lower. If we give more weight to the item that has increased most in price the inflation rate will be higher.
• If the weights don't reflect how we spend our money then the inflation rate will be over or under estimated - it won't accurately reflect how price changes are affecting us.
• CPIH


  Consumer Prices Index (including owner occupied housing costs). It is essentially the same as the CPI with the addition of owner-occupied housing costs and council tax. This gives us a better measure of how we are experiencing price rises in the UK.
• The government still bases its inflation target on the CPI; the inflation target is specified as a 2% increase (± 1% point) for the 12-month rate of change in the CPI.
• The CPIH is calculated each month and measures the average change in the price level.
• Every year the weightings are recalculated and the basket of goods included in the CPIH altered in line with current spending patterns.
• The CPIH is calculated by the Office for National Statistics (ONS).
• In the UK, the average level of prices is measured using the CPIH, the Consumer Prices Index
• Inflation rate


  Percentage change in the average level of prices - either as a year-on-year figure or a month-on-month figure
• The CPIH is calculated each month and measures the average change in the price level
• Every year the weightings are recalculated and the basket of goods included in the CPIH altered in line with current spending patterns
• The CPIH is calculated by the Office for National Statistics (ONS)
• Limitations of using the price indices to measure inflation include changes in quality, special offers, substitution effects, changes in the pattern of expenditure, and statistical errors
• Other Measures of Inflation

  • PPI - Pensioners Price Index
  • RPI - Retail Price Index
  • RPIX - Inflation rate excluding mortgage interest payments
  • RPIY - Excludes mortgage interest rates and indirect taxes
  • HCIP - Harmonised Indices of Consumer Prices
• The CPI and RPI both measure the average change in price of a fixed basket of goods and services over time, following a similar methodology
• Similarities between CPI and RPI

  • Price collection
  • Fixed basket approach
  • Weights
• Differences between CPI and RPI

  • Population base
  • Commodity coverage
  • Index methodology
• The CPIH includes housing costs, unlike the CPI
• Inflation = a rise in the average price level