AS Economics What is Inflation? AS Economics

By the end of this unit we’ll cover…

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

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.

BBC clip on 2009 inflation

What has happened to the CPI over the 5 years? Any evidence of DEFLATION over this period?

Dec 2009 Inflation data What effects do you think these changes had on the economy?

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?

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

What’s in the basket ?

AS Economics Typical exam Q How is the RPI or CPI measured….?

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.

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

CPI RPI

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

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

Hyperinflation – Yugoslavia in 1993

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!

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

Zimbabwe Hyperinflation in 2007…

And in 2008…. Originally worth $2….but only worth 4 cent in Jan 2009 before devaluation.

Most current data

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 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

Consumer Price Inflation in Russia 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

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

An interactive link for Inflation

Homework Revision You have an assessment NEXT WEEK…on Tuesday. Revise… –Macro Economic objectives –Circular flow of income –Measuring National Income –HDI issues… Reminder You have the textbook exercise to finish for Next lesson

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