Get Started. It's Free
or sign up with your email address
Inflation by Mind Map: Inflation

1. Deflation and Disinflation

1.1. DISINFLATION occurs when the inflation rate falls YoY but it is still positive, meaning the general price level is still rising but at a slower rate.

1.2. DEFLATION can be defined as a sustained fall in the price level.

1.2.1. “good deflation” if driven by an increase in Aggregate Supply (better productivity causing an increase in total output, a fall in price level, resulting in possibly more employment and international competitiveness of the G&S produced).

1.2.2. “Bad deflation” is a result of a contraction in Aggregate Demand (output falls, prices fall, unemployment rises, risk of deflationary spiral if consumer decide to wait for prices to fall further before making purchases).

2. Definition : a sustained increase in economy price level

3. Degrees of Inflation

3.1. Creeping inflation: low & steady increase in the general price level (2%-3%)

3.2. Hyperinflation: an increase in the general price level that exceeds 50%

3.3. Accelerating inflation: general price level increases at a more rapid rate

3.4. Unanticipated inflation: the inflation rate is not in line with people’s expectations

4. How to measure inflation ?

4.1. Consumer Price Index : an index thats hows the average change in the prices of a representative basket of products purchased by households.

4.2. 1. SELECTING A BASE YEAR, where no unusual things have occurred in the economy of a country. The general price level of the base year is given a value of 100. Base years are changed on a regular basis.

4.3. 2. FINDING OUT CONSUMERS’ SPENDING PATTERNS, usually through a survey which asks a sample of households to keep a detailed records of what they buy. Goods & services are then categorised (food, clothing, education, health, etc.).

4.4. 3. ATTACHING WEIGHTS TO DIFFERENT CATEGORIES, based on the proportion of total expenditure spent on different categories.

4.5. 4. FINDING OUT PRICE CHANGES, the same product might be sold at different prices in different locations or stores. A range of prices are recorded to avoid issues related to extremely low/high pricing.

4.6. 5. MULTIPLYING WEIGHTS BY PRICE CHANGES, the result represents the change in the Consumer Pricing Index or CPI.

5. Causes of Inflation

5.1. DEMAND-PULL Prices of goods & services are “pulled” up by an increase in aggregate demand which is not matched by an equivalent increase in aggregate supply.

5.1.1. Rise in government spending

5.1.2. consumer boom

5.1.3. increase in net exports

5.1.4. higher business confident

5.2. COST-PUSH Prices of goods & services are “pushed” up by an increase in the cost of production.

5.2.1. Wages

5.2.2. Material Costs

5.2.3. Fall in exchange rate