Studied by 4 people
Define the term CPI
consumer price index
Explain how CPI is calculated
base year is selected and a family expenditure survey is carried out to 7000 households
a representative basket of goods is created
each good has a weighting ( reflects proportion of household income)
inflation is calculated by weighting x price index
what are the limitations of CPI
not representative of all households
slow to respond to new products and services
what is demand pull inflation
when an increase in demand causes inflation
what is cost push inflation
when an increase in costs of production causes inflation
what causes cost push inflation
rise in raw material prices
rise in national minimum wage, corporation,indirect tax
what causes demand pull inflation
low tax rates
low interest rates
high gov spending
high quantitative easing
how can a weaker pound cause both demand pull and cost push inflation
weaker pound - imports dearer, exports cheaper
demand pull- high net trade
cost push- increase in price for imported raw materials
impact on firms
high business uncertainty
falling international competitiveness
increase in menu costs
impact on consumers
fall in real incomes leads to low standard of living
fall in purchasing power of incomes
impact on government
if inflation is uncertain, difficult to ensure public sector wages and pension increases are in line with inflation
impact on workers
wage price spiral- difficult to gain wage increase to maintain real income
what is RPI
relative price index
collects data once a month about changes in price of 700 goods
price change x weighting=price index
includes mortgage interest payments and council tax
