Macroeconomic Indicators Inflation and Deflation

Key terms Inflation Deflation CPI Family Expenditure Survey Cost-push inflation Demand-pull inflation Wage-price spiral Anticipated inflation Unanticipated inflation Shoe-leather costs Benign deflation Malevolent deflation

Retail Price Index (RPI) Consumer Price Index (CPI) –Weighted price index Relative importance as proportion of spending Price index X weighting = weighted price index

Limitations of CPI Different population groups experience different inflation. Not everyone is ‘average’. House prices not included but mortgage repayments influence spending. Over-estimate inflation. Prices may not reflect quality/innovations

Cost Push revisited Causes –Import costs –Labour costs –Indirect tax rises –Wage-price spirals

Demand Pull revisited

Quantity Theory of Money (Monetarists) That an increase in the money supply will lead to an increase in the price level –Fisher equation –Equation of exchange M x V = P x T (or MV = PY) M = Money supply V = the velocity of circulation P = general price level T = Transactions (output) Y = RNO (real GDP)

Velocity of circulation –The number of times a unit of currency changes hands in a year (to buy goods and services) –This is assumed to be constant –T and Y tend to increase slowly over time, therefore are also assumed to be constant –M x V = P x T if V and T (Y) are constant, a change in M will cause a change in P – inflation!

Consequences of Inflation Competitiveness Investment Distribution of income Industrial relations Fiscal drag Hyperinflation Money illusion Menu costs Shoe-leather costs

Inflation and Index numbers

Note the micro overlap Add the definitions for extra marks Include a diagram for extra marks