Inflation

• Who’s role is it to control inflation?

  Bank of England
• Inflation

  the rate of increase in the general price level in an

  economy
• Deflation

  the rate of decrease in the general price level

  Prices are lower this year than last year
• Disinflation


  a fall in the rate of inflation
• Explain steps in the calculation of CPI inflation

  • An annual Household Expenditure Survey is used to identify a typical basket of goods that are consumed – around 650 goods are in this basket

  • Each item in the basket is given a weight depending on how much income is spent on average on this item

  • A monthly price survey takes place to check the prices of the goods in the basket at different retailers

  • Taking into account the weights of each item an index is created which tracks the price level of all goods in the basket and can be compared to the base year, where the index number is 100
• Why do the items in the ‘basket’ of goods have to be updated every year?

  To reflect the changing composition of consumption, for example there are many products available today that were not even invented 30 years ago, so the basket must reflect current consumption patterns
• What is meant by CPI inflation?

  • Consumer Price Index is an international standard for calculating inflation, and is the rate that the Bank of England use when setting their inflation target.
• Define ‘weighted index’

  • A composite index where the value at a point in time is calculated by applying weights to the different items in the index e.g. the HDI is a weighted index and so is CPI inflation.
• Why is CPI rather than RPI used as the main measure of inflation in the UK?

  • Because this is the international standard for calculating inflation and it means that inflation comparisons can be made against other countries.
• If inflation was at 2% in 2013 and 1% in 2014 what has happened to the price level?

  • The price level is still increasing but at a slower rate – this is called ‘disinflation’
• What 2 main factors causes inflation

  • demand-pull inflation
  • cost-push inflation