This document discusses inflation and consumer price indexes. It begins by defining inflation as a sustained increase in price levels, which is measured in the UK using the Consumer Price Index (CPI). The CPI is a weighted price index that tracks the prices of goods in a typical household's shopping basket. It has some limitations, as it only measures average inflation and does not account for differences between population groups or include things like house prices. The document then examines causes of inflation, distinguishing between cost-push inflation, which results from rising production costs, and demand-pull inflation, which occurs when aggregate demand increases faster than the economy's productive capacity. Examples of each type of inflation are provided and illustrated with diagrams. Objectives and homework related

1. 1.4 Inflation

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. Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the CPI

4. Inflation Dominos!

5. What you should have 1

6. What you should have 2

7. Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the CPI

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. UK Inflation 2000-2013
3 key points about the CPI since 2007?

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. The Shopping Crunch?

12. The Shopping Crunch?
3 key points about prices 2009-2010

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. 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. Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the CPI

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. Objectives
• Revise key inflation terms
• Understand the CPI and
‘weighted price’ indexes
• Analyse the limitations of
the CPI
• Understand the causes of
inflation

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. Draw it! Cost push inflation
AD1
AS1
AS2
0
General price level
P1
Y1
Real GDP
Y2
P2

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. Draw it! Demand pull inflation

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. 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