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Summary ECS1601 - Chapter 10
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ECS1601 - Chapter 10 Exam Summary
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CHAPTER 10INFLATION
Definition of inflation:
Inflation is defined as a continuous and considerable rise in prices in general.
Four aspects of this definition are:
Neutral definition: which does not attempt to define inflation in terms of specific causes.
o Allows for all possible causes of inflation to be considered.
Casual definitions: definitions that highlight a cause of inflation and
therefore excluding all other possible causes.
o Can result in formulation of inappropriate polices for fighting inflation
Process: Inflation refers to a process on which the prices of most goods and
services are increasing from year to year (continuous increase)
Considerable: inflation is concerned with a considerable increase in prices.
In general: Inflation refers to an increase in prices in general. (there is
inflation when the prices of most goods and services in the economy are
increasing.
The measurement of inflation:
The consumer price index:
Measurement of inflation:
Month on the same month during the previous year:
CPI (consumer price index) – most commonly used indicator of the general price level.
Headline CPI: unadjusted CPI.
Once we have a set of CPI figures we can calculate the inflation rate. – done by calculating the
percentage change in the CPI from one period to the next. Inflation is always expressed as an
annual rate. (eg: inflation rate of 10%, this means that prices are increasing at a rate of 10% per
year.)
CPI is estimated and published monthly. For any particular year there are therefore 12 figures.
Calculation is as follows = index for a particular month for one year is compared to the same
month of a previous year divided by the previous year figure x 100
X–Y
Y x 100 = %
Inflation calculated in this way is subject to considerable fluctuations and not all
prices are measured every month. Therefore the Reserve Bank uses to CPIX to
calculate their inflation target.
Annual average on annual average:
Comparison of the average of all the monthly indices in a particular year
with the corresponding average for the previous year.
aX – aY
aY x 100 = %
This way the short-term fluctuations in the index figures for particular months
are eliminated. This measure gives a better indication of the inflation processes
over a longer period.
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