Inflation: the sustained increase in the general level of prices over a period (usually one year), measured by an increase in the consumer price index (CPI)

Inflation expectations: the opinion that households and firms have of the future rate of inflation

Inflation rate: the % change in prices over time, usually one year

What are the Three types of Inflation:

1. Demand-Pull Inflation: inflation that results from excessive demand

2. Cost-Push Inflation: inflation that results from rising production costs

3. Imported Inflation: inflation that results from an increase in the price of imports

Inflation:reduces the purchasing power of money and reduces living standards. The value of money decreases as inflation rises.

Who suffers because of inflation?

• 1. People on fixed income
• 2. People who save money
• 3. Creditors
• 4. Wage earners
• 5. Producers

Who gains because of inflation?

• 1. Those who have stock of goods
• 2. Debtors
• 3. Shareholders
• 4. Government

What are the other impacts of inflation

• 1. Reduced confidence in currency
• 2. Redistribution of income
• 3. Investment uncertainty
• 4.Bracket creep

Inflation is measured by the Consumer Price Index (CPI) – a measure used to show changes in the average price of goods/services over time.

How is CPI calculated?

• 1. A basket (wide range) of goods/services is selected
• 2. A weighting is given to each item (reflects the proportion of income spent on the item)
• 3. Calculating weighted price (multiply the weighting by the price of the item). Give a base value of 100 units in the start year
• 4. Repeat steps 1-3 in the next period
• 5. Calculate new index number – divide the total weighted price in the current year by the base year and multiply by 100



Calculating Real Value of Money:

• • Real value of money refers to the purchasing power or the amount of goods/services that can be bought
• • Decreasing real value of money means decreasing purchasing power or the amount of goods/services that can be bought with money

What are the policies to control inflation?

Price control: setting/fixing maximum prices or setting limits for price rises/control the increase in prices of goods/services

Wage control: minimise increase in minimum wage and does not allow excessive wage increases

Wage freeze: government placing a temporary ban on wage increases if the economy is experiencing high inflation

Fiscal policy: pass surplus budget to reduce government expenditure which reduces money supply and controls inflation

Tight/restrictive monetary policy: raising interest rates and decreasing lending, selling government securities on the open market operation, increase LGS ratio - all of which reduce money supply in the economy (contracting the economy) and controlling inflation

Inflation: long term general increase in the average price level of goods/services; it is measured using CPI (Consumer Price Index)

The three types of inflation are imported inflation, demand-pull inflation, and cost-push inflation

Phillip’s curve illustrates the relationship between inflation and unemployment
• o Imported inflation: caused by higher cost of imports
• o Demand -pull inflation: caused by increased demand
• o Cost-push inflation: caused by increased prices of factors of production