Lundin Gold April 2024 Corporate Presentation v4.pdf
Inflation.ppt
1. Inflation
A2 economics revision presentation on the
measurement of inflation; the causes and
consequences of inflation and economic policies to
control inflation
2. Defining inflation
• Inflation is defined as a sustained increase in the average price level
• The rate of inflation is measured by the annual percentage change in
the level of prices as measured by the retail prices index
• The Retail Price Index (RPI) measures the average change from month
to month in the prices of goods and services purchased by most
households
• The RPI 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
3. Recent changes to the retail price index ‘basket’
Changes to the basket in 2003 In Out
Food Round lettuce Frozen fish in sauce
Dried potted snack Tinned spaghetti
Diet-aid drink powder
Catering Takeaway caffe latte from coffee
shops
Alcohol Draught premium lager Brown ale
Household goods Flat pack bookcase Vinyl floor covering
Personal goods and services Designer spectacles Battery powered clock
Dental insurance Silver charm
Hair gel and Shower gel
Slimming clubs
Motoring expenditure Automatic car wash Lead replacement petrol
Fares and other travel costs Air fares
Leisure goods Car CD/radio auto-changer Electronic keyboard
Leisure services Golf non-member green fees
Horseracing admissions
4. Different measures of inflation
• Headline inflation (RPI)
– The headline rate - all items in the retail price index are counted in
this measure of inflation
• Underlying inflation (RPIX)
– The underlying rate excludes mortgage interest costs and is the one
favoured by the Treasury – this is the rate that is the subject of the
inflation target
• Harmonised index of consumer prices (HICP)
– The harmonised index of consumer prices (HICP) a standardized
measure of price inflation used to compare the inflation performance
of countries inside the European Union
5. Limitations of the retail price index
• The RPI is not fully representative
– Since the RPI represents the expenditure of the ‘average’
household, it may be inaccurate for the ‘non-typical’ household
• Housing Costs
– The ‘housing’ category of the RPI records changes in the costs of
rents, mortgage interest, property insurance, repairs, etc. It accounts
for around 16% of the index. Housing costs vary greatly from person
to person
• The Changing Quality of Goods and Services
– Although the price of a good or service may rise, this may be
accompanied by an improvement in quality as the good is updated
reflecting improvements in dynamic efficiency in the market-place
9. RPI inflation since the Bank became independent
RETAIL PRICE INFLATION IN THE UK SINCE MAY 1997
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
M
a
y
-
9
7
J
u
l
-
9
7
S
e
p
-
9
7
N
o
v
-
9
7
J
a
n
-
9
8
M
a
r
-
9
8
M
a
y
-
9
8
J
u
l
-
9
8
S
e
p
-
9
8
N
o
v
-
9
8
J
a
n
-
9
9
M
a
r
-
9
9
M
a
y
-
9
9
J
u
l
-
9
9
S
e
p
-
9
9
N
o
v
-
9
9
J
a
n
-
0
0
M
a
r
-
0
0
M
a
y
-
0
0
J
u
l
-
0
0
S
e
p
-
0
0
N
o
v
-
0
0
J
a
n
-
0
1
M
a
r
-
0
1
M
a
y
-
0
1
J
u
l
-
0
1
S
e
p
-
0
1
N
o
v
-
0
1
J
a
n
-
0
2
M
a
r
-
0
2
M
a
y
-
0
2
J
u
l
-
0
2
S
e
p
-
0
2
N
o
v
-
0
2
J
a
n
-
0
3
M
a
r
-
0
3
M
a
y
-
0
3
Source: Office for National Statistics
Annual
Percentage
Change
RPIX RPI
10. Selected International Inflation Data
CONSUMER PRICE INFLATION FOR SELECTED COUNTRIES
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Source: Organisation of Economic Cooperation and Development
Annual
%
Change
in
Consumer
Prices
Euro Zone 4.1 3.6 3.2 2.7 2.4 2.2 1.5 1.1 1.2 2.1 2.4 2.2
UK 7.5 4.2 2.5 2.0 2.6 2.5 1.8 1.6 1.3 0.8 1.2 1.3
USA 4.1 3.1 2.9 2.6 2.8 2.9 2.3 1.6 2.2 3.4 2.7 1.6
Japan 3.1 1.7 1.3 0.7 -0.2 0.2 1.8 0.6 -0.4 -0.7 -0.8 -0.9
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
12. Mapping the main causes of inflation in the UK
Earnings
Productivity
Unit labour
costs
Import
Prices
Commodity
Prices
Taxes
Profit Margins
RPIX
inflation
Basic
Pay
Bonuses +
overtime
Secular
Influences
(e.g. ICT
impact)
Economic
Cycle
Economic
Cycle
Fiscal Policy
Global
Economic
Cycle
+ =
+
+
+
Exchange rate
/ Profit margins
13. Demand-pull inflation
• Demand – pull inflation
– When there is excess AD for goods and services
– i.e. a positive output gap (where actual GDP > Potential GDP)
– Businesses respond by raising prices to increase their profit margins
– Demand-pull inflation associated with the boom phase of the cycle
(when SRAS becomes inelastic)
– Root causes of demand pull inflation are usually monetary in origin
• E.g. excessive growth of money demand / credit
• High levels of consumer spending
14. Main causes of demand pull inflation
• A depreciation of the exchange rate increases the price of imports and
reduces the foreign price of UK exports. If consumers buy fewer
imports, while exports grow, AD in will rise
• A reduction in direct or indirect taxation. If direct taxes are reduced
consumers will have more disposable income causing demand to rise
• Rapid growth of the money supply as a consequence of increased bank
and building society borrowing
• Rising consumer confidence and an increase in the rate of growth of
house prices
• Faster economic growth in other countries – providing a boost to UK
exports overseas
16. SRAS responds to excess aggregate demand
General
Price
Level
National
Income
AD1
SRAS1
P1
Y1
LRAS
Yfc
P2
Y2
AD2
SRAS2
P3
17. Demand-pull inflation using a non-linear AS curve
General
Price
Level
Real National Income
AD1
SRAS
P1
Y1
LRAS
Yfc
AD2
P2
Y2
AD3
P3
18. Cost Push Inflation
• Occurs when costs of production are increasing
• Causes:
– External economic shocks (commodity price fluctuations)
– A depreciation in the exchange rate
– Acceleration in wages and earnings as labour market tightens
• This leads to inward shift in short run aggregate supply curve
• Firms raise prices to protect their profit margins – better able to do
this when market demand is price inelastic
• “Wages often follow prices” – an increase in inflation may lead to a
rise in pay claims – this is known as a wage price spiral
• A rise in actual inflation can lead to an increase in inflationary
expectations
20. Illustrating cost-push inflation – with a non-linear SRAS
General
Price
Level
Real National Income
AD1
SRAS1
P1
Y1
LRAS
Yfc
SRAS2
P2
Y2
AD2
Y3
21. Recent trends in oil prices
Brent Crude Oil Price
10
15
20
25
30
35
J
a
n
-
0
0
M
a
r
-
0
0
M
a
y
-
0
0
J
u
l
-
0
0
S
e
p
-
0
0
N
o
v
-
0
0
J
a
n
-
0
1
M
a
r
-
0
1
M
a
y
-
0
1
J
u
l
-
0
1
S
e
p
-
0
1
N
o
v
-
0
1
J
a
n
-
0
2
M
a
r
-
0
2
M
a
y
-
0
2
J
u
l
-
0
2
S
e
p
-
0
2
N
o
v
-
0
2
J
a
n
-
0
3
M
a
r
-
0
3
M
a
y
-
0
3
22. The consequences of
inflation
‘Taken together, the verdict of economics, history and
common sense is that inflation and deflation are costly.
It is clear that very high inflation – in extreme cases
hyperinflation – can lead to a breakdown of the
economy. There is now a considerable body of
empirical evidence that inflation and output growth are
negatively correlated in high-inflation countries. For
inflation rates in single figures, the impact of inflation
on growth is less clear.’
Mervyn King adapted from a speech entitled “The
Inflation Target – Ten Years On” given in 2002
23. 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
• Inflation can favour borrowers at the expense of savers – because
inflation erodes the real value of existing debts
• Inflation can disrupt business planning and lead to lower investment
• Inflation is a possible cause of higher unemployment
• Rising inflation is associated with higher interest rates - this reduces
economic growth and can lead to a recession
24. Anticipated and unanticipated inflation
• Anticipated inflation:
– When people are able to make accurate predictions of inflation, they
can take steps to protect themselves from its effects
– For example, trade unions may exercise their collective bargaining
power to negotiate with employers for increases in money wages so
as to protect the real wages of union members
• Unanticipated inflation:
– Unanticipated inflation occurs when economic agents (people,
businesses and governments) make errors in their inflation forecasts
– Actual inflation may end up well below, or significantly above
expectations causing losses in real incomes and a redistribution of
income and wealth from one group in society to another
25. Government policies to control inflation
• Monetary policy
– Use of interest rates
– Manipulation of the exchange rate
• Fiscal policy
– Changes in direct taxation to influence disposable income and
spending
• Supply-side policies
– Designed to boost LRAS and reduce unit labour costs
• Direct price and wage controls
26. Base rates and inflation
BASE INTEREST RATES AND RPIX INFLATION
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Feb-88
Aug-88
Feb-89
Aug-89
Feb-90
Aug-90
Feb-91
Aug-91
Feb-92
Aug-92
Feb-93
Aug-93
Feb-94
Aug-94
Feb-95
Aug-95
Feb-96
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
Aug-01
Feb-02
Aug-02
Feb-03
Per
Cent
Base Rate RPIX Inflation
27. Explaining the recent low rate of inflation in the UK
• 1993-2003 – a return to the low and stable inflation last seen in the
1950s and 1960s
• Several factors explain the absence of inflation
– Subdued growth of wages and earnings (below 5%)
– Absence of major inflationary shocks such as a sharp jump in
international commodity prices
– Success of the Bank of England in keeping aggregate demand
under control through interest rate changes
– Much greater competitive pressure in many industries
– Strong pound has helped to keep inflation under control
– Expansion of information technology has helped to reduce costs
– Cuts in the prices charged by many of the privatized utilities
– Expectations of inflation have fallen!
