1.2 Inflation Flashcards
(18 cards)
What is inflation?
Sustained increase in GPL leading to a fall in real purchasing power
How is the rate of inflation measured?
Annual % change in consumer prices
What is the Bank of England target?
MPC set 2% as target
What is the Consumer Price Index?
- Main measure of inflation for UK & EU
- Weighted basket of 700 goods and services
Limitations of the CPI?
- Does not take into account housing (RPI)
- Limited number of items
- Different spending patterns
What is cost-push inflation
Costs of production increase leading to leftward shift in SRAS
What is demand-pull inflation?
When demand exceeds supply as economy moves towards full employment on LRAS
Winners from inflation?
- Trade Unions
- Debtors
- Producers
Losers from inflation?
- Pensioners
- Lenders
- Gig economy workers
Risks of high inflation?
- Inequality
- Falling real incomes
- Cost of borrowing
What do the effects of high inflation depend on?
- Time length
- Extent of central bank action
- Wage bargaining power
Positive effects on the government?
- Fiscal Drag
- Reduction in govt debt
- More corporation tax
Drawbacks for the government?
- Pressure on welfare
- Cause slower economic growth
- Worse int. competitiveness
Policies to control inflation?
1) Contractionary fiscal policy
2) Contractionary monetary policy (higher % and QT)
3) Supply side policies to increase productivity + innovation
4) Direct controls on wage increases
What is deflation?
Sustained fall in the GPL
What is disinflation?
Fall in the rate of inflation
Main causes of price deflation?
- Demand-side (fall in AD)
- Supply-side (improved efficiency)
Effects of deflation?
- Higher debt
- Lower wealth effect
- Lower profit margins
- Lower spending if consumers expect prices to keep falling
