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What is Inflation?

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Title: What is Inflation?


1
What is Inflation?
  • AS Economics

2
By the end of this unit well cover
Today well look at.
3
Key Issues
  • The meaning of inflation
  • Measuring the general price level
  • Deflation and hyperinflation
  • Current trends in UK Inflation

4
Defining inflation
  • Inflation is a sustained increase in the average
    price level of a country.
  • The rate of inflation is measured by the annual
    percentage change in the level of prices as
    measured by the consumer price index.
  • A sustained fall in the general price level is
    called deflation in this situation, the rate of
    inflation becomes negative.

5
BBC clip on 2009 inflation
6
Any evidence of DEFLATION over this period?
What has happened to the CPI over the 5 years?
7
Dec 2009 Inflation data
What effects do you think these changes had on
the economy?
8
Describe the changes in inflation for the 4
countries. What has happened to prices in Japan?
What implications are there for consumers and
then for businesses?
9
Key Concepts
  • The Consumer Price Index (CPI)
  • Measures changes in the cost of living of a
    typical household.
  • The CPI is a weighted price index.
  • It 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

10
Whats in the basket?
11
Whats in the basket?
12
Whats in the basket?
13
Typical exam Q
  • How is the RPI or CPI measured.?

14
Key Concepts
  • The Cost of Living
  • Is the quantity of goods and services that a
    given amount of money (e.g. 1000 a month) will
    buy for a typical household.
  • The Inflation Rate
  • The annual percentage in the consumer price
    index.
  • This is calculated relative to an arbitrary base
    year set equal to 100.

15
The consumer price index
  • The consumer price index is the main measure of
    inflation for the UK
  • The government has set the Bank of England a
    target for inflation (using the CPI) of 2
  • The aim of this target is to achieve a sustained
    period of low and stable inflation
  • Low stable inflation is also known as price
    stability

16
CPI
RPI
17
Hyper inflation
A Bank of England employee pictured in the 1920s
with a 20 million deutschmark note whose
purchasing power equated to a box of matches
18
Hyper inflation
A Bank of England employee pictured in the 1920s
with a 20 million deutschmark note whose
purchasing power equated to a box of matches
The hyperinflation in Weimar Germany led to
employees taking their wages home in larger
wicker baskets
19
Hyperinflation Yugoslavia in 1993
20
Yugoslavia the true impact
  • Between January 1, 1991 and April 1, 1998, the
    dinar was officially devalued 18 times (three of
    which exceeded 99), and 22 zeros were lopped off
    that unit of account.
  • For a sense of the impact on the local
    population, imagine the value of your bank
    accounts in dollars and then move the decimal
    point 22 places to the left. Then try to buy
    something!

21
Hyperinflation
  • With hyperinflation - inflation goes out of
    control
  • Huge amounts of money has to be printed to meet
    peoples demand for cash
  • Money effectively becomes worthless
  • The effect is nearly always to lead to a collapse
    in business and consumer confidence and a
    recession
  • In most cases a new monetary system may have to
    be created

22
Zimbabwe Hyperinflation in 2007
23
And in 2008.
Originally worth 2.but only worth 4 cent in Jan
2009 before devaluation.
24
Most current data
25
Zimbabwe removes 12 zeros from currency Jan 2009
  • One trillion in Zimbabwe dollars now will be
    equivalent to one Zimbabwe dollar
  • Zimbabwe's inflation rate officially at 231
    million percent as of last July 2008.
  • Many Zimbabwean traders have stopped accepting
    local currency
  • Acting finance minister recently allowed all
    Zimbabweans to use foreign currency

Zimbabwe switches into official monthly
deflation Dec 18 2009
26
Consumer Price Inflation in Russia
a result of the collapse in the external value of
the rouble in 1998
Think about each sector of the economy
What effects do you think this had on the economy?
27
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

28
An interactive link for Inflation
29
Homework
Reminder You have the textbook exercise to finish
for Next lesson
  • Revision
  • You have an assessment NEXT WEEKon Tuesday.
  • Revise
  • Macro Economic objectives
  • Circular flow of income
  • Measuring National Income
  • HDI issues

30
Plenary
  • What is inflation?
  • How does the govt measure the general price
    level?
  • What is deflation?
  • What is hyperinflation?
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