2.1.2 Inflation (Macro)

INFLATION

An increase in the general price level of goods and services over a set period of time

DISINFLATION

Occurs when there has been a fall in the rate of inflation. It means the general price level is increasing at a slower rate.

Disinflation means a slowdown in the rate of inflation — prices are still rising, but at a slower pace than before

DEFLATION

Deflations occurs when prices go down. I.e. the general price level is falling and the value of money is increasing.

GAINERS FROM HIGH INFLATION

Workers with strong wage bargaining power

Debtors if real interest rates on loans become negative

Producers if their prices continue to rise faster than costs

LOSERS FROM HIGH INFLATION

Retired people relying on fixed income/ pensions --> money doesn't go as far as cost of living increases

Lender if real interest rates on loans are negative

Savers if real returns on their savings deposits are negative

Workers in low paid job with little or no bargaining power

CPI

consumer price index (measures the average price of a basket of goods)

COSTS OF HIGH INFLATION FOR GOVERNMENT

Pressure on the governement to raise the level of welfare benefits, including the state pension and work benefits to help control poverty --> therefore government have less money to spend on other important services such as healthcare.

High inflation can cause a real GDP growth to slowdown- this can lead to lower tax revenue and the government then having to borrow more money, have more debt and pay more interest

High inflation can lead to increased market interest rates making governement borrowing more expensive when they issue new bonds. If the government spends more than they have, they have to sell bonds --> go into debt, paying interest.

High relative inflation can lead to a worsening of international competitiveness causing a fall in exports which can threaten jobs and GDP growth.

BENEFITS OF HIGH INFLATION ON THE GOVERNMENT

Higher inflation can lead to a fiscal drag- this happens when peoples wages/ incomes are rising in nominal terms which causes them to pay more in direct and indirect taxation.

High inflation can cause a reduction in the real value of the government's outstanding debt

The real interest rate on borrowing money might be negative if the nominal yield is less than the rate of inflation

Moderate positive inflation helps businesses to make higher profits- this generate more tax revenue for the government via corporation tax and increased VAT payments

BOX FOR COST OF INFLATION IS ON ONENOTE