Measuring Inflation Flashcards
(15 cards)
Define Inflation
The sustained rise in the average price of goods and services over a period of time.
OR
A fall in the value of money
Inflation (positive) is what?
When the average price of goods and services are rising
Deflation (negative) is what?
When the average price of goods and services are falling
What is Hyperinflation?
Prices rise extremely quickly and money rapidly loses its value
What is Disinflation?
When the rate of inflation is slowing down, so prices are still rising but at a slower speed
Retail Price Index is what?
RPI is a measurement used for inflation. Two surveys are carried out;
The Living Costs and Food survey (6000 households) - what people spend money on and the proportion of their income
The second based on prices - measures changes of price of around 700 goods and services (chosen based off the first)
From the RPI surveys how do we work out the index number?
The price changes in the second survey are multiplied by the weightings of the first.
So the % change to the index number over time is inflation.
The basket of goods is what?
Goods and services - and represents what the average household spends its money on
Consumer Price Index is what?
CPI is a mother measure of inflation
What 3 things are different about the CPI?
What does this mean?
Doesn’t include - mortgage interest payments or council tax
Slightly different formula is used
A larger popn sample used
Because of this the CPI tends to be lower than RPI - except when interest rates are low
In the UK which is the official measure of inflation?
CPI and is often used for international comparisons
What are the limitations of CPI and RPI?
RPI excludes top 4% of households
The CPI covers a broader range of popn but excludes mortgage interest payments and council tax
For the Living Cost and Food Survey - info could be inaccurate
Basket of goods only changes once a year
What are the CPI and RPI important for?
Government policy - help to determine wages and benefits
Employers and trade unions use them as a starting point in negotiations
Gov uses to decide on increases in state pensions and other welfare benefits
Some benefits are index linked - rise automatically each year by same % as chosen index
What else are they important for?
Measuring changes in the UK’s international competitiveness
If the UK’s inflation rate (due to CPI) is higher than countries it trades with, then UK goods will be less price competitive - it’ll cost more for other countries to buy
Exports will fall and imports (relatively cheaper due to domestic inflation) will increase
What is the aim for inflation?
For it to be low and stable
