Price inflation

Inflation

General sustained rise in the prices of goods and services

How is inflation measured

Basket of goods purchased by a typical family is identified

Weight the average price of each item in proportion to households income

Add all the average prices

What is used to measure inflation

Consumer price index and retail price index

Demand pull inflation

Caused by aggregate demand rising faster than supply

Cost push inflation

Caused by rising wages and production costs. Firms will raise their prices to cover these costs

Imported inflation

Caused by increased costs of imported products following a fall in exchange rate

Advantages of inflation

Encourage consumers to buy goods sooner than later

Reduces the real cost of loan repayments

Disadvantages of inflation

Decreases purchasing power

Increases cost of production

Created economic uncertainty

Stagflation

When unemployment and inflation are both rising

Disinflation

Slowdown in the rate of inflation

Deflation

A continuous decline in the prices