Inflation

What is Inflation

• Is a general and continuing rise in prices

• Deflation is to describe a fall in average prices

  • Also used to describe where aggregate demand is falling

  • Aggregate demand is total demand in the economy

How is it measured

• Governments measure and monitor inflation rate

• Measured using the Consumer Price Index (CPI)

  • A measure of average prices calculated from the same price information; a monthly price is worked out then the average price is converted into an index number

Type of Inflation

Demand-Pull Inflation

• Inflation caused by too much demand

• If demand (same with aggregate) increases, there would be an increase in prices

Causes are..

• Rising consumer spending by tax cuts or low interest rates

• Sharp increases in government spending

• Rising demand for resources by firms

• Booming demand for exports

Cost-Push Inflation

• Inflation cause by rising costs

  • When businesses are faced with high costs they rise prices to protect their profit

Causes are…

• Rising costs of imported goods

• Wage increases

• Increases in taxation

Relationship between inflation and interest rates

• Monetarists believe there is a link between inflation and growth in money supply

  • Money supply is the stock of notes and coins, bank deposits and other financial assets in the economy

Causes may be…

• When households, firms and the government borrow more money from banks to fund extra spending.

Impact of Inflation

Prices

• Main problem with Inflation is that prices are rising.

• Reduces the purchasing power of money

  • People can’t buy as much with their income

  • Households will experience fall in living standards

Wages

• Workers…