What is Inflation?

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What is Inflation?

• AS Economics

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By the end of this unit well cover
Today well look at.
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Key Issues

• The meaning of inflation
• Measuring the general price level
• Deflation and hyperinflation
• Current trends in UK Inflation

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Defining inflation

• Inflation is a sustained increase in the average
  price level of a country.
• The rate of inflation is measured by the annual
  percentage change in the level of prices as
  measured by the consumer price index.
• A sustained fall in the general price level is
  called deflation in this situation, the rate of
  inflation becomes negative.

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BBC clip on 2009 inflation
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Any evidence of DEFLATION over this period?
What has happened to the CPI over the 5 years?
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Dec 2009 Inflation data
What effects do you think these changes had on
the economy?
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Describe the changes in inflation for the 4
countries. What has happened to prices in Japan?
What implications are there for consumers and
then for businesses?
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Key Concepts

• The Consumer Price Index (CPI)
• Measures changes in the cost of living of a
  typical household.
• The CPI is a weighted price index.
• It is compiled using a representative selection
  of more than 600 separate goods and services for
  which price movements are regularly measured in
  146 areas throughout the UK
• Some 130,000 separate price quotations are used
  each month in compiling the index, which is
  published each month

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Whats in the basket?
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Whats in the basket?
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Whats in the basket?
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Typical exam Q

• How is the RPI or CPI measured.?

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Key Concepts

• The Cost of Living
• Is the quantity of goods and services that a
  given amount of money (e.g. 1000 a month) will
  buy for a typical household.
• The Inflation Rate
• The annual percentage in the consumer price
  index.
• This is calculated relative to an arbitrary base
  year set equal to 100.

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The consumer price index

• The consumer price index is the main measure of
  inflation for the UK
• The government has set the Bank of England a
  target for inflation (using the CPI) of 2
• The aim of this target is to achieve a sustained
  period of low and stable inflation
• Low stable inflation is also known as price
  stability

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CPI
RPI
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Hyper inflation
A Bank of England employee pictured in the 1920s
with a 20 million deutschmark note whose
purchasing power equated to a box of matches
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Hyper inflation
A Bank of England employee pictured in the 1920s
with a 20 million deutschmark note whose
purchasing power equated to a box of matches
The hyperinflation in Weimar Germany led to
employees taking their wages home in larger
wicker baskets
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Hyperinflation Yugoslavia in 1993
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Yugoslavia the true impact

• Between January 1, 1991 and April 1, 1998, the
  dinar was officially devalued 18 times (three of
  which exceeded 99), and 22 zeros were lopped off
  that unit of account.
• For a sense of the impact on the local
  population, imagine the value of your bank
  accounts in dollars and then move the decimal
  point 22 places to the left. Then try to buy
  something!

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Hyperinflation

• With hyperinflation - inflation goes out of
  control
• Huge amounts of money has to be printed to meet
  peoples demand for cash
• Money effectively becomes worthless
• The effect is nearly always to lead to a collapse
  in business and consumer confidence and a
  recession
• In most cases a new monetary system may have to
  be created

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Zimbabwe Hyperinflation in 2007
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And in 2008.
Originally worth 2.but only worth 4 cent in Jan
2009 before devaluation.
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Most current data
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Zimbabwe removes 12 zeros from currency Jan 2009

• One trillion in Zimbabwe dollars now will be
  equivalent to one Zimbabwe dollar
• Zimbabwe's inflation rate officially at 231
  million percent as of last July 2008.
• Many Zimbabwean traders have stopped accepting
  local currency
• Acting finance minister recently allowed all
  Zimbabweans to use foreign currency

Zimbabwe switches into official monthly
deflation Dec 18 2009
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Consumer Price Inflation in Russia
a result of the collapse in the external value of
the rouble in 1998
Think about each sector of the economy
What effects do you think this had on the economy?
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Costs and Consequences of Inflation

• Money loses its value and people lose confidence
  in money as the value of savings is reduced
• Inflation can get out of control - price
  increases lead to higher wage demands as people
  try to maintain their living standards. This is
  known as a wage-price spiral.
• Consumers and businesses on fixed incomes lose
  out because the their real incomes falls -
  employees in poor bargaining positions lose out

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An interactive link for Inflation
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Homework
Reminder You have the textbook exercise to finish
for Next lesson

• Revision
• You have an assessment NEXT WEEKon Tuesday.
• Revise
• Macro Economic objectives
• Circular flow of income
• Measuring National Income
• HDI issues

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Plenary

• What is inflation?
• How does the govt measure the general price
  level?
• What is deflation?
• What is hyperinflation?