7.5c - Inflation Flashcards
Inflation definition
The sustained rise in the level of prices
How is inflation calculated?
Using the Consumer Price Index
Cost-push inflation definition
When the cost of production rises and so the business puts the price of its products up to cover it
Wage-price spiral definition
When employees expect inflation and rising prices so demand higher wages leading to higher prices
Demand-pull inflation definition
When prices go up because demand has increase but supply has not
Advantages to a business of inflation:
- If business borrows money and prices rise it becomes easier to pay back the money in real terms
- Raise prices
- Property and stock prices may also rise, increasing value of fixed assets
- If interest rates are lower than rate of inflation it will be cheaper to borrow
Disadvantages to a business of inflation:
- If a product is price elastic, sales may fall
- Business may have to spend more on marketing
- Workers will want a wage rise
- Suppliers may increase prices
- Interest rates will rise
Advantages for a business of low inflation:
- Low interest rates
- Possible increase in exports
- More stability in the economy
Disadvantages for a business of low inflation:
- Cannot raise prices
- Low inflation is close to deflation
- Lowers business confidence so may not commit to investments
What does a fall in inflation mean?
Prices are not going up as quick as they used to
What will a rise in interest rates do to inflation levels and why?
It will reduce them because there will be higher repayments and more of an incentive to save in the bank
Advantages to a business of a fall in interest rates:
- Increases consumption
- Lower savings
- Increased investments
- Highly geared firms would see payments fall
Disadvantages for a business of a fall in interest rates:
- Lower return on savings
- Need more employees to meet demand (leads to rise in wages)
