26 - Inflation

Inflation

A sustained increase in the general price level of goods and services over time

Deflation

A sustained decrease in the general price level of goods and services over time

Aggregate demand

Total demand in the economy including consumption, investment, government expenditure and exports minus imports

Aggregate demand equation

AD = C + I + G + (X - M)

Consumer Price Index (CPI)

Measure of the general price level (excluding house costs) over time

Retail Price Index (RPI)

Measure of the general price level, which includes house prices and council tax

CPI Inflation value

above 0%

CPI deflation value

below 0%

CPI disinflation value

drops but still above 0 %

Types of inflation

Demand-pull inflation

Cost-push inflation

Demand-pull inflation

Inflation caused by too much demand in the economy relative to supply (in overheated economies)

Cost-push inflation

Inflation caused by rising business costs

Monetarists

economists who believe there is a strong link between growth in the money supply and inflation

Interest rates

The price paid to lenders for borrowed money, it is the price of money

What happens if there is too much money and not enough goods?

Higher prices and inflation

Inflation impact on prices

Purchasing power of money reduced

Inflation impact on wages

Conflicts between employers and trade unions

Inflation impact on exports

Demand for exports falls causing unemployment

Inflation impact on unemployment

more output = more jobs

Inflation impact on menu costs

price changes (cost to firms). eg. printing new menus/brochures

Inflation impact on shoe leather costs

Resources wasted by looking for best value for money eg. time

Inflation impact on uncertainty

Future choices are made difficult

Inflation impact on investment

Cancelled projects

Inflation impact on business + consumer confidence

Hyperinflation worries them

Purchasing power of money

Amount of g+s that can be bought with a fixed sum of money

Menu costs

Costs to firms from repeated price changes

Shoe leather costs

Costs to firms + consumers of searching for new suppliers when inflation is high (eg. time lost)

Hyperinflation

very high levels of inflation; rising prices get out of control