Inflation

1. Disinflation

1.1. A reduction in the rate of inflation. i.e prices are still rising but they are not rising by as much.

2. Deflation

2.1. The fall of prices and indicates a slowdown in the rate of growth of output in the economy.

3. The general increase of prices in the economy which erodes the purchasing power of money.Low inflation is generally considered to be better than high inflation.

4. Ways to measure inflation

4.1. Consumer prices index (CPI)

4.1.1. A basket of goods collected by the ONS, prices of each of those products (around 700) recorded from 20,000 shops in 141 locations and online sites and the prices are updated evrey month, with collectors visiting the same retailers to monitor idenbtical goods.

4.1.1.1. New items are added every year, but in the same fashion, many items are removed.

4.1.1.2. Prices are combined using ino on the average household spending pattern to create an overall price index.

4.1.1.3. Worked out through the living costs and food survey- it takes into account how muech is spent on ach item so they are weighted.

4.1.1.3.1. I.e. we spend more on peterol than on postage stamps so an increase in the prices of peterol will have a bigger impact on the overall rate oif inflation.

4.1.2. Limitations: . Impossible for the figure to take into account every single god that is sold in the country- not totally represenative . Does not include the price of housing, data may be lower than it should be . Difficult to make comparisons with historical data since the figure is more recent that RPI

4.2. Retail prices index (RPI)

4.2.1. Includes housing costs such as mortgage and interest payments and council tax (CPI does not)

4.2.2. Excludes the top 4% of income pensioners as they are not "average" households whilst CPI covers all households and all incomes.

5. Demand pull inflation

5.1. Prices in a market are determined by demand and supply, and a shift in either will cause price to change.

5.2. Inflation can therefore be caused by an increase in aggregate demand total demand for goods and services in the economy.

5.2.1. If any factor which increases AD was to increase, then inflation would increase.

5.2.1.1. AKA. Directly proportional relationship

6. Cost push inflation

6.1. Whilst an increase in aggregate demand can push prices up,a decrease in aggregate supply may also push prices up.

6.2. When businesses find their costs have risen, they will put up prices to maintain their profit margins. This xan be caused by any factor which decreases AD. (AD=C+I+G+(X-M))

7. Factors that may lead to inflation

7.1. The growth of money

7.1.1. Another potential cause of inflation is there being too much money in the economy.

7.1.2. If people have access to money, they will want to spend itm but if there is no inrease in the amount of goods ad services supplied, then prices will have to rise.

8. Impact of inflation

8.1. Individuals

8.1.1. Each pound is worth less- less purchasing power

8.1.2. Could be regressive is higher inflation is driven by rising prices of necessities

8.1.2.1. Regressive: If it has a larger impact on poorer people than those who are richer.

8.1.3. Workers' falling incomes in real terms

8.1.4. Employees in poor bargaining positions tned to lose out on opportunities

8.1.5. Reduces the "real" value of savings

8.1.6. Reduces the "real" value of debt

8.2. Firms

8.2.1. Increase the cost of raw materials, production, and operating expenses for businesses

8.2.2. Profitability decreases

8.3. Government

8.3.1. High inflation can cause GDP growth to slowdown – leading to lower tax revenues & increased borrowing.

8.3.2. Pressure to raise the value of state welfare benefits including the state pension or out of work benefits.

8.3.3. High inflation can lead to increased market interest rates making government borrowing more expensive.

8.4. Economy

8.4.1. High inflation poses a challenge for mortgages and the wider property market, as it dents purchasing power.

8.4.2. In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.