Inflation Revision Notes

What is Inflation?

Inflation is a persistent increase in the level of prices and a persistent decline in the value of money. It is a measure of how much prices of goods and services have gone up over time and the depreciation of money.

What causes inflation?

Inflation results when the economy has too much demand for available production. There are two different types of inflation:

·       Demand-Pull Inflation: This occurs when the government/consumers/business try to produce more output than the economy is capable of producing.

·       Cost-Push Inflation: This is inflation due to decreases in supply, mainly due to increases in production cost.

How inflation affects Consumers?

Inflation affects consumers because as inflation rises money loses its value and people will lose confidence in saving meaning they will spend more. They will lose confidence in money also because as inflation rises the value of money declines.

Inflation also affects consumers as they may demand higher wages to attempt to control their living standards due to higher prices.

Inflation seriously affects people on fixed incomes i.e. pensioners who may struggle to survive. Inflation means prices of goods and services rise and because their income is fixed they may struggle to survive. The money they have loses value.

How inflation affects Businesses?

Inflation may lead to a decrease in sales, where there is high inflation it’s hard for business to remain competitive especially with overseas companies.

Businesses may be advantaged from inflation due to industry wide price rises that enable growth and can use debt as a source of finance cheaper.

They can be disadvantaged due to the rising costs; some may also not be able to pass the rising costs back on ton customers due to too much overseas competition.  It leads to lower investment and can be associated with higher interest rates which reduces economic growth and can lead to a recession.

How inflation affects the economy?

Inflation reduces the value of money, obviously, this increases the value of food and people’s incomes generally stay the same (except for people on MNW who see they yearly April increase.)

The Government gets more revenue through the tax it collects from the high profits entrepreneurs make as a result of inflation…