Inflation

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  • Inflation
    • Measures
      • CPI
        • Family Expenditure Survey
        • Limitations
          • Not representative of everyone - an average
          • Doesn't include house prices
          • Price rises can hide quality improvements
      • RPI
    • Causes
      • Domestic
        • Supermarket prices
        • VAT increases
      • External
        • Higher crude oil prices
        • Increase in prices of commodities
        • Currency fluctuations
    • Types
      • Cost-push
        • Rise in cost of imported raw materials
        • Rising labour costs
        • Higher indirect taxes
        • Wage-price spirals
      • Demand-pull
        • Little spare capacity in economy
          • Increase in AD = increase in prices
    • Consequences
      • Hyperinflation
        • Destroys currency
        • Return to barter
      • International competitiveness
        • If UK inflation higher than competitors', exports less competitive
          • AD growth slows --> output gap
          • 30% of UK GDP = exports
      • Effect on investment
        • More uncertainty = less investment
          • Leads to uncertainty
            • More common when inflation is high, e.g. UK 1970/80s
      • Unanticipated inflation
        • Leads to uncertainty
          • More common when inflation is high, e.g. UK 1970/80s
      • Menu costs
        • Mainly administrative
          • Frequent price changes
          • Reprogramming
      • Shoe-leather costs
        • Time spent shopping around
      • Effect on distribution of income
        • Fixed-rate borrowers 'win'
        • Savers 'lose'
      • Worsening industrial relations
        • Workers push for higher pay
        • Strikes
      • Fiscal drag
        • Inflation pushes workers into next tax threshold
    • Positives
      • Pay packets and revenues rise
        • Money illusion though?
    • Quantity theory of money
      • Fisher equation = equation of exchange
        • M x V = P x T (or MV = PY)
          • M = money supply
          • V = velocity of circulation
          • P = general price level
          • T = transactions = output
          • Y = RNO = GDP

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