Inflation - Notes (2024)

Retail Price Index (RPI)

• Definition: Tracks changes in the cost of a fixed basket of goods over time from retailers.

• Characteristics:

  • Includes around 130,000 products from approximately 600 different items.

  • Monthly price quotes are recorded to estimate changes in prices.

  • The range of goods/services and their weights must be revised regularly due to changing consumer spending patterns.

Year 2021 Price Changes

• Base Year Details:

  • Values calculated using Weighted Method:

    • A (candy): Price = $0.12, Weight = 1, Index Calculation = 100 + 20% = 120 => 120x1 = 120

    • B (bread): Price = $3.50, Weight = 2, Index Calculation = 100 + 17% = 117 => 117x2 = 234

    • C (meat): Price = $5.00, Weight = 3, Index Calculation = 100 - 17% = 83 => 83x3 = 249

• Total Index Calculation: 603 ÷ 6 = 100.5

• Conclusion:

  • Average price increase between 2019 and 2021 is 0.5%.

  • The index method shows a 7% price increase, while the weighted method shows a 0.5% increase.

  • The difference is attributed to meat prices, which have a heavier weight, decreasing in price.

Class Work Assignment

• Task: Calculate the average % increase/decrease in consumer prices between 2018 and 2019 using provided price data.

Index Method for 2018 Prices

Page 6: Consumer Price Index (CPI) Overview

Overview of CPI

• CPI is the most popular index, differing from RPI by relying on consumer data rather than retailer data.

• Data Collection:

  • 7,000 households are surveyed annually.

  • 270 families contribute data every two weeks about their expenditure over two weeks.

• Base Year:

  • A base year is identified, assigning a price value of 100 for that date.

Inflation Rates by Country (2022)

• Country Inflation Rates:

  • Bahamas: 5.66%

  • Canada: 6.90%

  • Guyana: 7.59%

  • USA: 8.05%

  • Mexico: 8.03%

  • Venezuela: 210.00%

Causes of Inflation

• Some economists identify two main causes: Excess Demand & Rising Costs.

1. Demand-Pull Inflation: Caused when demand exceeds supply, often difficult to manage with full employment.

2. Cost-Push Inflation: Occurs due to rising production cost factors, higher indirect taxes, and falling exchange rates.

3. Increase in Money Supply: More money in the economy can raise spending, leading to price increases.

Page 7: Understanding Demand-Pull and Cost-Push Inflation

Demand-Pull Inflation

• It occurs when total demand for goods/services exceeds total supply, worsened under full employment conditions.

Cost-Push Inflation

• Arises when production costs increase (wages, materials), leading to higher prices.

Money Supply Dynamics

• Confusion often arises between total spending and money supply; more money can lead to increased spending even if the money's value remains unchanged.

• Example Calculation:

  • With a total money supply of $1000 changing hands 5 times: Total Spending = $5000.

  • If the supply increases to $1500, Total Spending = $7500, showing direct impact on expenditure.

Consequences of Inflation

• Continuous inflation spirals out of control.

• Income distribution is affected.

• borrowers benefit at the lenders expense. (I lend you 200 but by time you pay me back 200 dollars will be worth less).

• Inflation can degrade purchasing power.

• Discourages saving.

• It impacts the Balance of Payments, making exports less competitive.

Page 8: Policies to Tackle Inflation

Reducing Demand (Demand-Pull) Strategies

• Fiscal Policy: Increase taxes and cut government spending.

• Monetary Policy: Tighten bank lending, raise interest rates to restrict money supply.

• Hire Purchase Restrictions: Raise down payment requirements and shorten repayment periods.

Increasing Supply Policies

• Government initiatives can help boost supply:

  • Improve productive efficiency through worker training.

  • Provide grants for investment in modern technology.

  • Enhance infrastructure (roads, utilities) to support growth.

Income Policies

• Government can regulate wage increases to manage cost inflation.

• It involves imposing taxes on rent and profits.

Page 9: Controlling Prices and Understanding Inflation's Impact

Price Control Measures

• Direct government intervention can manage inflation through price controls.

Effects of Inflation on Trade

• Imports: Higher local prices lead to increased retail costs and higher import tax revenue.

• Exports: The value of export goods may decrease in international markets, leading to lower consumer and government revenues.

Deflation: A Double-Edged Sword

• Definition: A steady decrease in prices, occurring when the money supply falls, or the supply of goods increases.

• Common Causes: An oversupply of goods leads to lower prices to clear stock.

• Consequences of Deflation:

  1. Hurts borrowers (money borrowed is worth more over time).

  2. Benefits lenders as they receive more valuable repayments.

  3. Fixed-income earners gain purchasing power.

  4. Can lead to business closures and rising unemployment due to reduced profit margins.