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What is Inflation?. AS Economics. By the end of this unit we’ll cover…. Today we’ll look at…. Key Issues. The meaning of inflation Measuring the general price level Deflation and hyperinflation Current trends in UK Inflation. Defining inflation. - PowerPoint PPT Presentation
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Tutor2u & Mrs G
Key Issues
• The meaning of inflation
• Measuring the general price level
• Deflation and hyperinflation
• Current trends in UK Inflation
Tutor2u & Mrs G
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.
Tutor2u & Mrs G
What has happened to the CPI over the 5
years?
Any evidence of DEFLATION over
this period?
Tutor2u & Mrs G
Dec 2009 Inflation data What effects do you think these changes
had on the economy?
Tutor2u & Mrs G
Annual percentage change in consumer pricesConsumer Price Inflation in Selected Countries
Source: OECD World Economic Outlook
00 01 02 03 04 05 06 07 08
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
Per
cent
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
UKJapan
China
United States
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?
Tutor2u & Mrs G
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
AS Economics
Tutor2u Tutor2u & Mrs G& Mrs G
Typical exam Q
How is the RPI or CPI measured….?
Tutor2u & Mrs G
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.
Tutor2u & Mrs G
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
Tutor2u & Mrs G
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
Tutor2u & Mrs G
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
Tutor2u & Mrs G
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!
Tutor2u & Mrs G
Hyperinflation
• With hyperinflation - inflation goes out of control– Huge amounts of money has to be printed to meet
people’s 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
Tutor2u & Mrs G
And in 2008….
Originally worth $2….but only worth 4 cent in Jan 2009 before devaluation.
Tutor2u & Mrs G
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 deflationDec 18 2009
Tutor2u & Mrs G
Consumer Price Inflation in RussiaRussia, Consumer Prices (Annual Percentage Change)
Source: Reuters EcoWin
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Per
cent
-5
0
5
10
15
20
25
30
35
40
a result of the collapse in the
external value of the rouble in 1998
What effects do you think this had on the
economy?Think about each ‘sector’
of the economy
Tutor2u & Mrs G
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
Tutor2u & Mrs G
Homework
• Revision
• You have an assessment NEXT WEEK…on Tuesday.
• Revise…– Macro Economic objectives
– Circular flow of income
– Measuring National Income
– HDI issues…
ReminderYou have the textbook
exercise to finish for Next lesson
Tutor2u & Mrs G
Plenary…
• What is inflation?• How does the govt measure the
general price level?• What is deflation?• What is hyperinflation?
