3.1.3

Inflation

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Inflation

Inflation can be measured through CPI or RPI.

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Inflation

  • Inflation is defined as a persistent increase in the general price level over a given period of time.
  • Inflation figures are normally given on an annualised basis.
  • The most common measures for inflation are CPI (Consumer Price Index) and RPI (Retail Prices Index).
  • They are calculated by measuring the change in the value of a basket of goods and services.
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An economic indicator

  • One reason inflation is an indicator of the strength of the economy is because high and unexpected inflation would mean goods and services are becoming unaffordable as the purchasing power of income falls.
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Rate of inflation

  • In the UK, the Office for National Statistics (ONS) calculates the inflation rate by collecting prices on a basket of around 700 representative goods and services.
  • Each item is weighted in the basket according to the % of household income spent on them. So higher weights means if the price of that item changes, it has a larger impact on the overall value of the CPI and inflation.
  • The basket (items in it and the weights) is updated once a year to reflect changing consumer consumption behaviour.

Index Numbers

Index numbers are used by economists to both represent and to understand economic data in a much clearer way.

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Index numbers

  • These are a way of expressing economic data.
    • E.g. if you were told the average price of housing in the UK was £256,010, and it is forecast to rise to £268,221, it is hard to process this data.
    • E.g. if you wanted to compare which countries had done the best since the 2008 financial crash, index numbers would help to show this clearly.
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How to calculate an index number

  • You need to choose a "base". This is commonly a year but doesn't have to be.
  • It is the “thing” that everything else is being compared to.
    • E.g. if the base year is 2008, then the index number in 2009 is being compared to 2008, the chosen base year.
  • It is convention to set the base year index number equal to 100.
  • To calculate an inflation rate we use the following formula: (New value / Base year value ) x 100.
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Example of calculating an index number

  • So for 2013, it would be £250,010 / £250,010 x 100 = 100.
  • For convention, 100 is always the base year value.
  • 102.84 is 2.84% higher than 100. This means that the 2014 house prices are 2.84% higher the 2013 house prices (the base year).
  • This process can be repeated for different years.

Inflation, Deflation and Disinflation

You need to know the definitions for inflation, deflation and disinflation.

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Inflation

  • Inflation is defined as a persistent increase in the general price level, over a given period of time.
  • Prices are going up.
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Deflation

  • Deflation is defined as a persistent decrease in the general price level, over a given period of time.
  • Prices are going down.
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Disinflation

  • Disinflation is a decrease in the rate of increases of prices – it is when inflation falls but remains positive.
  • If the inflation rate falls from 5% to 2%, prices are still rising, just at a slower pace.
  • Prices are still going up!

Jump to other topics

1Introduction to Markets

1.1Nature of Economics

1.1.1Economics as a Social Science

1.1.2Positive & Normative Economic Statements

1.1.3The Economic Problem

1.1.4Resources

1.1.5Production Possibility Frontiers

1.1.6Specialisation & Division of Labour

1.1.7Types of Economies

1.1.8End of Topic Test - Nature of Economics

1.1.9Application Questions - Nature of Economics

1.2How Markets Work

1.2.1Rational Decision Making

1.2.2Demand

1.2.3Elasticities of Demand

1.2.4Elasticities of Demand 2

1.2.5Elasticity & Revenue

1.2.6Supply

1.2.7Elasticity of Supply

1.2.8Price Determination

1.2.9Price Mechanism

1.2.10Consumer & Producer Surplus

1.2.11Indirect Taxes & Subsidies

1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?

1.2.13Alternative View of Consumer Behaviour

1.2.14End of Topic Test - Markets

1.2.15A-A* (AO3/4) - Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

7.1International Economics - Globalisation & Trade

7.1.1Globalisation

7.1.2Globalisation for LEDCs

7.1.3Globalisation for MEDCs

7.1.4Specialisation & Trade

7.1.5Pattern of Trade

7.1.6Terms of Trade

7.1.7Trading Blocs

7.1.8UK, EU & WTO

7.1.9End of Topic Test - Globalisation & Trade

7.1.10A-A* (AO3/4) - Globalisation & Trade

7.2International Economics - Currency

7.2.1Merged Currency

7.2.2Restrictions on Free Trade

7.2.3Arguments for Protectionism

7.2.4Arguments Against Protectionism

7.2.5Balance of Payments

7.2.6Balance of Payments 2

7.2.7Floating Exchange Rates

7.2.8Fixed Exchange Rate

7.2.9International Competitiveness

7.2.10End of Topic Test - International Economy

7.2.11Application Questions - International Economics

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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National Income Data

Causes of Inflation