Inflation Flashcards
(21 cards)
What is the general price level?
Average price level of all goods and services in an economy
What is inflation?
Sustained increase in general price level.
What is the rate do inflation?
Annual price change in the level of prices.
What is deflation?
When the rate of inflation becomes negative
What are the two measures of inflation?
Retail price index and consumer price index
What is the retail price index?
Measure of inflation. Calculated by finding the change in price for items in a specific basket and weighting them according to their importance. Tax allowances, benefits and pensions are often revised with this index.
What is the consumer price index?
Measure of inflation. Main measure in the EU. Govt inflation target is based on it and Bank of England sets rates to meet this target.
What are the main differences between CPI and RPI?
RPI is always higher than CPI because CPI leaves out housing costs. CPI follows an international classification system whilst RPI has a unique one.
What are the causes of inflation?
Demand pull inflation and cost push inflation
How does demand pull inflation work?
Too much demand; people want stuff that’s not available so price increases.
What causes demand pull inflation?
Excessive consumer spending (low interest rates), firm spending, govt spending or tax cuts, demand for U.K. exports
What is cost pull inflation?
Costs increasing in the supply side of the economy (price of factors of production increase)
What causes cost push inflation?
Increase wages, increased import prices, govt increase in indirect tax, firms raising prices of inelastic goods for increased profit margins.
What are the costs if inflation?
Shoe leather costs, menu costs, people will fixed incomes lose out, less competitive abroad, fiscal drag, negative real interest rates, risk of wage inflation.
What are shoe leather costs?
A cost of inflation. Searching around to find the best deal
What are menu costs?
A cost of inflation. Cost of changing price information.
Why does inflation cause less competitiveness abroad?
Makes prices more expensive = bigger trade deficit
What is fiscal drag?
A cost of inflation. Wages rise with inflation so peoples incomes may go into higher tax brackets.
What are negative real interest rates?
A cost of inflation. People who rely on savings become poorer.
What is the risk of wage inflation?
A cost of inflation. Wage prices spiral as people ask for higher wages. Can cause hyperinflation but very rare.
What are the benefits of inflation?
Favours borrowers (erodes value of existing debts), ensures typical price changes are up so relative price adjustments can happen more easily.
