Transcript Inflation-intro-and

Inflation
October 2016
Learning objective: To understand the definition of inflation and be able to
evaluate which parts of the economy lose or win as a result of inflation
References: Edexcel getting started guide section 2.1.2
http://qualifications.pearson.com/content/dam/pdf/A%20Level/economics
-a/2015/teaching-materials/Getting_Started_Guide_new.pdf
Anderton chapter 30 p201-208
Inflation
“a sustained increase in the general price level leading
to a decrease in the purchasing power of money”
1985
Household
income :
10,000/yr
2015
Cost of
Living:
10,000/yr
Household
income:
30,000/yr
Cost of
Living:
30,000/yr
(focus on whole economy - not one particular industry – it’s possible for
individual industry to experience decreasing prices when the economy is
experiencing overall inflation)
Inflation Target
- gov’t has set a target of 2% for inflation – this is
deemed the best rate for a stable economy (higher
than that and inflation can have negative effects;
lower than that can mean a stagnant economy)
As prices rise, the value of money falls – the same
money can’t buy as much as it used to.
The Bank of England is charged with the
responsibility of controlling inflation
Measuring Inflation:
Consumer Prices Index
1. Food and Living Costs Survey – find out what
households spend their money on (average basket of
goods – approx. 700 – basket updated annually)
2. Weights Determined – goods that we spend a
higher proportion of income on get more importance
in the basket
3. Prices Checked – from stores across the UK
4. Weights Applied – price changes multiplied by the
weight of that item
5. Total CPI – weighted price changes are totalled to
give this month’s figure for price inflation
Calculating CPI
Product
Weight
Fuel
10%
X
+ 20%
=
+ 2%
Food
25%
X
- 10%
=
- 2.5%
Motoring
5%
X
0%
=
0%
Leisure
20%
X
+ 5%
=
+ 1%
Clothing
10%
X
+ 6%
=
+ 0.6%
Housing
30%
X
+ 5%
=
+ 1.5%
100%
Price
Change
Total CPI:
Weighted Price
Change
+ 2.6%
CPI calculation exercise:
Food: +2%
Alcohol, tobacco: +6.1%
Clothing: -0.5%
Housing, utilities: +2.2%
Furniture & household: 1.7%
Health: +2.4%
Transport: +2.5%
Communication: +3.4%
Recreation: +1.2%
Education: +3.2%
Restaurants, hotels: +3.0%
Misc: +2.3%
Product Division
% Price Change
Weight in basket
Weighted price change
A few definitions:
• Inflation – sustained increase in the general
price level
• Deflation – a decrease in the general price level
(negative inflation)
• Disinflation – a decrease in the rate of inflation
(eg. Inflation was 2.5% last month and it is now
2%)
Other Measures of Inflation
• RPI – slightly different contents of basket & method
of measurement
- includes mortgage interest payments, excluded from CPI
- excludes richest households & pensioners
- uses an arithmetic mean – CPI uses a geometric mean
• PPI – Producer Price Index – costs faced by
producers (a leading indicator of RPI)