Inflation Flashcards
what is inflation
- the persistent increase of prices in an economy in a year
what is disinflation
when prices are rising, but at a slower rate than before
what is deflation
the persistent fall in prices in an economy in a year, occurs when the inflation rate is negative
how to carry out a consumer price index
- expenditure survey carried out
- a consumer basket of most popular goods and services is formed with avg prices attached
- prices of these goods and services are weighted based on percentage of income
- weighted prices are added to give total weighted price of the basket
how to work out index number
raw number / base year raw number x 100
how to work out annual inflation rate
work out percentage change of index numbers
percentage change equation
change divided by original x 100
what is the RPI
- alternative measure of inflation
- same as the CPI, but housing costs are included
- also calculated using an arithmetic mean, whilst CPU uses geometric mean, so the RPI will give higher measures
problems with using CPI
- personal inflation rates differ, not everybody will be buying the goods and services in the basket, eg low vs high income households
- certain goods will be subject to significant price fluctuations which could distort the overall CPI inflation rate eg food and energy(gas, electricity and fuel) as demand and supply of these are very price inelastic, so any change in these will cause a higher price, therefore higher CPI
- they don’t include housing costs like rent, mortgage payments, council tax, but households spend lots of money on these, can be fixed using CPIH(cpi with housing)
what is core CPI
the CPI minus price inelastic goods like food, energy
when would we use PPI(producer price index)
if we think that changes in energy prices would affect CPI in the future
when does demand pull inflation occur
when demand shifts to the right, increase in economic growth but increase in demand pull inflationary pressure
why does demand pull inflationary pressure occur
- when AD shifts to the right, there is greater pressure on existing factors of production to produce more output, they are becoming scarcer, so prices of these scarce resources are going up, price of capital, land will increase, meaning firms have to increase their costs of production, they will then pass on these costs as higher prices
things that’ll shift AD right
- decrease IR
- decrease income or corporation tax
- increased consumer business confidence
- increased govt spending
- weak exchange rate
when does cost push inflation occur
when SRAS shifts to the left