Transcript Inflation-intro-and-measurement

Inflation
“a sustained increase in the general price level”
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 through changes
in the interest rate.
Measuring Inflation
1. Living Costs and Food Survey – find out what
households spend their money on (average
basket of goods – approx. 600)
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 concumer 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 – in 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 –
importantly, includes mortgage interest
(CPI does not include mortgage interest
payments – this would overstate changes in
interest rates made by the MPC)
• PPI – Producer Price Index – costs faced by
producers (a leading indicator of RPI)