inflation d
a sustained increase in the general price level
deflation d
a fall in the general price level
CPI ( consumer price index) d
the headline measure of inflation, derived from movements in a weighted basket of consumer goods over a 12-month period
family expenditure survey d
a representative monthly survey of UK household expenditure used to derive changes in the consumer price index
what is the most popular measure of inflation in the UK
CPI
what is the government’s target for CPI inflation
2.0 % (+ / - 1 %)
difference between CPI and RPI
CPI excludes a number of categories, notably housing costs
how are the goods that are measured in the CPI chosen
using information from the family expenditure survey
are all types of item weighted evenly in the CPI
no, the spending is divided into categories and weighted according to its importance
what are the limitations of the CPI
different population groups experience different rates of inflation
CPI doesn’t include house prices
may be over-estimation because does not take into account quality improvements
what are the two traditional ways of categorising the causes of inflation
demand-pull
cost-push
cost-push inflation d
inflation caused by economy-wide increases in production costs
indirect taxes d
taxes levied on spending on goods and services
how do you show cost-pull inflation on a diagram
shift to the left of AS
wage-price spiral d
process whereby increases in costs, such as wages, lead to increases in prices
what are the sources of cost-push inflation
rise in cost of imported raw materials
rising labour costs
higher indirect taxes
wage-price spirals
demand-pull inflation d
inflation resulting from too much demand in the economy, relative to supply capacity
when is demand-pull inflation most likely to occur
when there is little spare capacity in the economy
when does aggregate demand increase
when one or more of its components increases
quantity theory of money d
the theory that increases in the money supply will lead to increases in the price level
money supply d
the total amount of money in circulation or in existence in a country
Fisher equation d
the mathematical identity MV = PY (or MV = PT) M is money supply V is velocity of circulation of money P is the general price level T is transactions in a year Y is real value of national output
velocity of circulation d
the number of times the money supply changes hands in a year
hyperinflation d
very large, rapid increases in the general price level
what is the notable thing about the Fisher equation
T and Y tend to increase slowly so are assumed to be constant
V and T (Y) are constant so money supply and price level are directly related
what does hyperinflation indicate
an economy which is out of control
talk about international competitiveness and inflation
if UK inflation is higher than competitors then UK goods and services will become less price competitive
talk about the effect on investment of inflation
inflation creates uncertainty about future costs, revenues and profitability so investment levels fall
talk about unanticipated inflation
leads to uncertainty and undermines investment
anticipated inflation d
where economic agents correctly predict the future rate of inflation
unanticipated inflation d
where economic agents do not accurately predict the future rate of inflation
talk about inflation and the effect on distribution of income
inflation creates winners and losers, winners will be borrowers of money, losers will be savers with fixed returns
talk about inflation and worsening industrial relations
strikes can be widespread during periods of inflation as workers feel they are losing out and push for higher pay
fiscal drag d
increases in the burden of taxation when tax allowances are not increased in line with inflation
explain fiscal drag
when people pay a higher percentage of their income in tax when there is inflation
what is a way to reduce fiscal drag
increasing the tax-free allowance in line with inflation
what value defines hyper inflation
inflation in excess of 1000% per year
money illusion d
when economic agents fail to realise that changes in money values are not the same as changes in real values
why can inflation be good
workers see rise in pay packets and firms see revenues increasing, could be money illusion but is preferable to no price increases
benign deflation d
falling prices resulting from technological advances across the economy
malevolent deflation d
falling prices resulting from a significant downturn in economic activity
what are the 2 types of deflation
benign and malevolent