2.1 inflation

Inflation

Sustained increase in the level of prices of goods and services in the economy

Deflation

A sustained decrease in the level of inflation in an economy

Disinflation

A reduction in overall rate of inflation

CPI

the basket includes over 710 different goods and services from 20,000 shops, the asset is updated annually in order to reflect changing consumer habits, each item is given a weigh based on how much average household spends on it, prices are gathered monthly from shops, prices are then compared to a base year and percentage of inflation is calculated by current basket/ base year basket x 100

Why is it necessary to regularly. Update the basket of goods

• changing spending patterns- changes due to trends, technology and overall lifestyle changes- changes the relative weight of the items, as more popular items have a higher wi=eight and influence on cpi. it therefore allows it to reflect true changes in the cost of living

Limitations of cpi

Not representative of every single good which is sold

Does not include the price of housing

Difficult to make comparisons

Types of inflation

Demand pull- ad is higher than supply

Cost push- increased production costs

Impact of inflation on consumers

Less spending power, drive rising prices of necessities- such as food, housing etc.

fall in income, lead to unemployment

Reduces real value of savings

Impact of inflation on firms

Loss of competitiveness

Rise in costs of raw materials and labour

Less investment as decrease in business confidence `