Inflation

• Inflation - rate of increase in prices over a period of time, causes a decrease in purchasing power of money

  • Cost-push inflation
  • Demand-pull inflation
• Disinflation - a decrease in the rate of inflation
• Cost-push inflation - rise in prices caused by increased production costs
• Demand-pull inflation - rise in prices caused by excess demand
• Monetary Inflation - rise in prices caused by excessive growth of the money supply
• Hyperinflation - very rapid and large increase in prices
• Deflation - a decrease in the price of goods and services over a period of time

  • Beneficial - Increase in aggregate supply due to innovation
  • Harmful - decrease in aggregate demand
• Consumer price index (CPI) - a measure of the average change in prices over time in a fixed market basket of goods and services
• Impacts of inflation

  • Decrease purchasing power of money
  • Increase cost of raw materials = increase production cost
  • Creates uncertainty = decrease in consumer confidence
  • Impact a country’s balance of payments
• Policies to control inflation - Demand Pull Inflations(Monetary / Fiscal Policy)

  • Increase Taxes
  • Lower Government Spending
  • Raise Interest rates
• Policies to control inflation - Cost Push Inflation (Supply Side Policy)

  • Improve Education/ Training
  • Privatisation / Deregulation
• How do you account for goods that take a greater percentage in some households in the consumer price index?

  Weighting