Inflation

Consumer Price Index (CPI)

The measure of the price level targeted by the BoE. Measuring the cost of the goods and services bought by a typical consumer in order to measure inflation against its target.

CPIH

Official measure of inflation by the ONS, measure of CPI inflation adding owner occupier housing costs and council tax, main measure of inflation within the UK.

Retail Prices Index (RPI)

A measure of the price level which has been calculated in the UK for over 60 years and is used in a variety of contexts such as by the government to index welfare benefits and regulated train fares.

Basket of Goods

the 700 representative items that households buy over a period of time on which inflation calculations are based. Determined by the living cost and food survey.

Living costs and food survey

Survey of around 5,500 participating households every two weeks to help work out spending patterns and decide the basket of goods and services for the CPI index.

Price Survey

Prices collected from 140 random areas of the UK, locations chosen by random sampling and a range of outlets are surveyed. 100,000 prices collected for the 700 basket goods with a further 80,000 collected where local sampling may be inappropriate.

Weights

Measure used to calculate CPI where different products within the basket are "weighted" depending on household expenditure patterns. This means that a price rise in a weighted item is representative on the proportion of income it uses. Greater weight to goods is given if they take up a greater proportion of family income.

Limitations of the CPI Index.

The CPI Index does not factor in for housing related costs such as mortgage rate payments and taxes which the RPI does account for due to their importance in household budgets.

Demand Pull Inflation

a sustained rise in the price level caused by a rightward shift of the aggregate demand curve along the AS curve where it is close to full capacity, which causes a large increase in the general price level.

Cost Push inflation

a sustained rise in the price level caused by a upward shift of the aggregate supply curve. Often due to increase in the prices of resources and labour for firms or negative supply shocks.

Internal causes of inflation

A large surge in property prices, higher wages, boom in credit and money supplies, rise in business taxes.

External causes of inflation

Increase in world oil/gas prices, global inflation in commodity prices, a depreciation of the exchange rate, high inflation in other countries.

Growth of the Money Supply

some economists argue that inflation is mainly caused by increases in the money supply. This is because the money supply and spending in the economy is growing faster than the real output of the economy. This results in more money chasing the same amount of goods which causes firms to push up prices. Seen in Zimbabwe Inflation 2008.

Shoe leather cost

the resources wasted and the opportunity cost of when inflation encourages people to search for different banks with better interest rates rather than one they are currently at, which is very time consuming.

Fiscal Drag

People's income being dragged into higher tax bands as a result of tax brackets not being adjusted in line with inflation, meaning that workers are not left better off.

Tax revenue windfall

unexpected financial gain through higher rates of taxation for the government.

Costs of High Inflation

Lower purchasing power, Erosion of savings, Lower export competitiveness , Wage/Consumer prices spiral (Higher wages cause higher prices, which people with higher wages will then buy and it spirals), Fiscal Drag, Inflationary Noise (Uncertainty over consumption and consumer spending)

Benefits of low inflation

Workers with higher wages, Consumption is natural, Firms encouraged to increase output, Can keep unemployed low in a recession, Reduces real value of debt, Improvement of government finances

Indexation

When anticipated inflation allows for the automatic correction of a wages or the rate of interest for the effects of inflation by law or contract

Deflation

A decrease in the general level of prices

Disinflation

a situation in which price increases are slowing (the inflation rate is declining)

Anticipated Inflation

Increases in prices which economic actors are able to predict with accuracy.

Unanticipated inflation

Increases in prices which economic actors like consumers and firms fail to predict accurately and so their decisions are based on poor information.

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

Fiscal Boost

Occurs when an economy slows down or goes into recession. Welfare benefits provide a 'safety net' and prevent the economy falling too far and hence avoid the worst effects of falling income.

Deflationary spiral

A downward trend in prices, wages, and business activity; a deflationary pattern in which falling prices cause a business slow-down, as consumers hold off on spending, which in turn leads to lower wages, a further fall in prices, and even less business activity