Inflation
Inflation is the general sustained rise in the price level
It’s measured by calculating the change in a weighted price
index over time
The two main measures are the consumer prices index and the
retail prices index
The price index only measures inflation for average households
It can’t include the quality and distribution of goods over time
Inflation might be demand pull or cost push depending on
whether its caused by excess demand or rising costs
Inflation is generally considered to give rise to economic costs
in society
Deflation is falling prices and leads to a depressed demand in
an economy
Inflation is defined as a sustained general rise in prices across
the economy
Deflation is the sustained general fall in prices across the
economy
Disinflation is the fall in the rate of inflation
Creeping inflation is when general rise in prices is quite
moderate
Hyperinflation is when inflation levels are very high (over 50%
per year)
Reflation is the rise in GDP which occurs following a recession
Purchasing power is the buying power of a unit of currency and
is inversely related to the rate of inflation
Unit labour costs reflect total labour costs including social
security and employers’ pension contributions and include the
costs of self employed labour incurred in the production of a
unit of economic output
The inflation rate us the annual rate of change of the average
price of goods and services
, Stagflation is the period of time when inflation. Is rising or is
very high at a time when the economy is in recession
o The economy is stagnating but there’s also inflation
Deflationary policies are policies pursued by the government
o These are designed to reduce the rate of economic
growth
o If they’re successful they will reduce the rate of growth of
inflation
o They are usually not linked to deflation
Prices of a representative range of goods and services (a basket
of goods) need to be recorded on a regular basis
Each year households are asked to record their expenditure for
a month and from these figures its possible to calculate how
the average household spends its money
The results are averaged out to find the average price of goods
and services and converted into index form
Changes in food prices are the most important because a larger
proportion of household income is spent on food
Any price index is a weighted average and different rates of
inflationary are calculated by changing the weightings of the
index
The consumer price index only ensures an average rate of
inflation for all households across the UK
Once inflation is established in an economy it’s hard to remove
o Most agents raise their inflation expectations and build it
into their calculations and decisions
A rise in inflation can lead to an increase in inflation
expectations which can lead to higher wage claims and rising
costs
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