2.1.2(inflation) Flashcards
Inflation
The sustained rise in the general price level over time
Deflation
Average price level of an economy falls
Disinflation
Falling rate of inflation
Consumer price index
Calculation of inflation rate in the UK
Survey
- weighted basket of goods
- measures average price change of the goods
- updated annually
Limitations of CPI
Basket of goods is only representative of the average household
Not accurate for household who do not own cars etc
- CPI is slow to respond to new goods and services
- hard to make historical comparisons
Retail price index
Includes house costs such as payments in mortgage interest and council tax
Excluded the top 4% of earners and low income pensioners
- tCPI akes into account the fact that when prices rise people will switch to product that has gone up less, RPI does not
Causes of inflation
- demand pull- when aggregate demand is growing unsustainably. Usually occurs when resources are fully employed
- cost push- supply, occurs when firms face rising costs
- growth of the money supply
The effects of inflation on consumers:
- those on low, fixed incomes are hit the hardest
Regressive effect - pp of money falls
- if consumers have loans, the value of repayment will be lower
Effects of inflation on firms
- low interest rates means borrowing and investing is more attractive than saving profits
- workers might demand higher wages
- firms may be less price competitive on a global scale if inflation is high
- unpredictable inflation will reduce business confidence
Effects of inflation on the government:
- the government will have to increase the value of the state pension and welfare payments the cost of living is increasing
Effects of inflation on workers
- real incomes fall with inflation, so workers have less disposable income
- if firms face higher costs, there could be redundancies when firms try and cut their costs
