inflation

• Inflation


  Sustained increase in the general price level

  
• More money


  Increased consumption, increased AD, increased price level
• Hyperinflation


  Inflation rises over 50%
• Causes of inflation


  • Demand pull inflation
  • Cost push inflation

  
• Demand pull inflation


  • Price level is pulled up, AD increasing then pulling up the price level and causing inflation

  
• Cost push inflation


  • Higher costs decrease SRAS, pushing up the price level and causing inflation

  
• Deflation is a sustained decrease in the general price level

  
• Causes of deflation


  • Decrease in AD
  • Increase in AS

  
• Decrease in prices


  Decreased cost, firms can produce more
• Deflation is caused by a reduction in demand or an increase in aggregate supply
• Value of money


  Changes due to inflation and deflation

  
• Nominal income


  The amount you actually earn
• Real income


  Nominal income with the effects of inflation removed

  
• Calculating inflation rate


  Change in price level = new - old

  Divide original price level and times by 100

  
• Calculating price level


  Stage 1: ONS conducts Living Costs and Food Survey

  Stage 2: ONS conducts price survey

  Stage 3: Weighted average of all prices

  
• Consumer Price Index (CPI)


  Measure of inflation

  
• Disinflation


  Inflation rate is positive but decreasing

  
• Problems measuring inflation


  • Unusual spending habits
  • Time lag
  • Changes in quantity
  • No mortgages

  
• RPI vs CPI


  RPI includes mortgage repayments, CPI excludes them
• Effects of high inflation


  • Protects against risk of negative inflation

  Price wage spiral