1.4 Inflation
Unit 4 part 1
• The economic cycle and economic
growth
• Use of national income data to assess
living standards
• Inflatio...
Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the...
Inflation Dominos!
What you should have 1
What you should have 2
Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the...
What is inflation
• Sustained increase in the price level
• Measured in the UK using CPI
(Consumer Price Index)
• Rate of ...
UK Inflation 2000-2013
3 key points about the CPI since 2007?
The CPI
• A weighted price index to measure the
change in prices of a typical ‘basket’ of
goods
• Categories of spending t...
The Shopping Crunch?
The Shopping Crunch?
3 key points about prices 2009-2010
Weighted Price Indexes
Price Index: change from 100 to 106 = +6%
25% of household expenditure on food
So 106 X 25 = 2650
A...
Weighted Price Indexes
Recalculate the price index if:
1) If the index of food prices grows to 120
2) Cheaper imports caus...
Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the...
Limitations of the CPI?
Population
Groups vary
•CPI = average household
•But different groups have different spending and ...
Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the...
Cost-push inflation
• Rise in costs of
imported raw
materials eg wheat
and oil
• Rising labour costs
• Higher indirect
tax...
Draw it! Cost push inflation
AD1
AS1
AS2
0
General price level
P1
Y1
Real GDP
Y2
P2
Demand-pull inflation
• Little spare capacity in
the economy
• Increase in AD leads
only to an increase in
prices
• AD inc...
Draw it! Demand pull inflation
Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the...
Homework: for Weds 2nd
October
• Read and make notes on pages 140-
143
• Read the extracts on pages 144 and
145, and then ...
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A2 Inflation

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A2 Inflation

  1. 1. 1.4 Inflation
  2. 2. Unit 4 part 1 • The economic cycle and economic growth • Use of national income data to assess living standards • Inflation and deflation • Unemployment
  3. 3. Objectives • Revise key inflation terms • Understand the CPI and ‘weighted price’ indexes • Analyse the limitations of the CPI
  4. 4. Inflation Dominos!
  5. 5. What you should have 1
  6. 6. What you should have 2
  7. 7. Objectives • Revise key inflation terms • Understand the CPI and ‘weighted price’ indexes • Analyse the limitations of the CPI
  8. 8. What is inflation • Sustained increase in the price level • Measured in the UK using CPI (Consumer Price Index) • Rate of inflation (%) = percentage change in the CPI over the previous 12 months = annual inflation • Inflation describes a general movement upwards • Government’s current target = 2.0% (+/- 1%) = very difficult to hit central target
  9. 9. UK Inflation 2000-2013 3 key points about the CPI since 2007?
  10. 10. The CPI • A weighted price index to measure the change in prices of a typical ‘basket’ of goods • Categories of spending that go into the ‘basket’ change subtly each year using information from the Family Expenditure Survey • EG in 2008 smoothies, muffins and USB drives included by CD single removed • Reflects the Harmonised Index of consumer prices measure used in Europe
  11. 11. The Shopping Crunch?
  12. 12. The Shopping Crunch? 3 key points about prices 2009-2010
  13. 13. Weighted Price Indexes Price Index: change from 100 to 106 = +6% 25% of household expenditure on food So 106 X 25 = 2650 Add them together, then divide by total of weights (100) New price index = 106.6
  14. 14. Weighted Price Indexes Recalculate the price index if: 1) If the index of food prices grows to 120 2) Cheaper imports caused the index of clothing prices to fall to 95 3) If the weighting of transport increases to eighteen per cent and that for miscellaneous items falls by four per cent
  15. 15. Objectives • Revise key inflation terms • Understand the CPI and ‘weighted price’ indexes • Analyse the limitations of the CPI
  16. 16. Limitations of the CPI? Population Groups vary •CPI = average household •But different groups have different spending and therefore different inflation •EG weighting for cars and tobacco will be irrelevant for non-smokers and those without a car No house prices •Mortgage payments represent high proportion of spending of younger house buyers •Older house owners have paid off mortgages Over-estimate inflation •Price rises may hide real improvements in quality •Prices of many cars and electrical goods have fallen over the last 30 years, but innovations have made them significantly better
  17. 17. Objectives • Revise key inflation terms • Understand the CPI and ‘weighted price’ indexes • Analyse the limitations of the CPI • Understand the causes of inflation
  18. 18. Cost-push inflation • Rise in costs of imported raw materials eg wheat and oil • Rising labour costs • Higher indirect taxes. VAT up from 17.5% to 20% • Wage-price spirals
  19. 19. Draw it! Cost push inflation AD1 AS1 AS2 0 General price level P1 Y1 Real GDP Y2 P2
  20. 20. Demand-pull inflation • Little spare capacity in the economy • Increase in AD leads only to an increase in prices • AD increases when one or more of it’s components increases. E.G increased spending due to reduced income tax
  21. 21. Draw it! Demand pull inflation
  22. 22. Objectives • Revise key inflation terms • Understand the CPI and ‘weighted price’ indexes • Analyse the limitations of the CPI • Understand the causes of inflation
  23. 23. Homework: for Weds 2nd October • Read and make notes on pages 140- 143 • Read the extracts on pages 144 and 145, and then answer questions 1(a) and 2(a) • All info on firefly

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