Inflationanddeflation.pdfVIP

Inflation and deflation What is inflation? Inflation is a sustained rise in the price level. This means that, on average, the prices of products in an economy are going up over time. As the price level rises each pound buys fewer products. This means the value or purchasing power of money falls. What is deflation? Deflation refers to a sustained decrease in the price level. Purchasing power increases and households can buy more products with their income How is inflation measured? Inflation is usually reported as the percentage change in the price level, over the last 12 months. Economist talk about the annual rate of inflation Define the inflation rate. The percentage change in the price level over a given period of time. What is inflationary pressure? Upward forces on the price level from cost push or demand pull inflation factors. Firms may opt to hold or raise prices to maintain margins How is the annual rate of inflation measured? The annual rate of inflation is found by calculating the percentage change in a given price index eg the CPI, over the last 12 months Define the price level. The average of the prices of all products in the economy How is the price level measured? The price level is reported as an index value eg 103. What is an index? An index measures the weighted average of a group of items compared to its base year value of 100. What is a price index? A price index measures the price level of a weighted basket (group) of products. The index value of 100 in the base (first) year is the benchmark against which to measure subsequent changes. Eg a rise in the index in year 2 to 105, means a 5% rise in general prices. The annual rate of inflation is five per cent. List main UK price indices. The Consumer Prices Index (CPI) and the Retail Price Index (RPI) How are indexes like Consumer Prices Index (CPI) constructed? ? A base year is chosen during which prices were relatively stable eg 2005 ? The ONS conduct a Liv