AS Economics
What is Inflation?
AS Economics
Tutor2u &
Mrs G
By the end of this unit we’ll cover…
Today we’ll look
at….
Tutor2u & Mrs G
Key Issues
• The meaning of inflation
• Measuring the general price level
• Deflation and hyperinflation
• Current trends in UK Inflation
Tutor2u & Mrs G
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.
Tutor2u & Mrs G
BBC clip on 2009 inflation
Tutor2u & Mrs G
Any evidence of
What has happened
DEFLATION over
to the CPI overthis
theperiod?
5 years?
Tutor2u & Mrs G
Dec 2009 Inflation data
Tutor2u & Mrs G
What effects do you
think these changes
had on the economy?
Consumer Price Inflation in Selected Countries
Annual percentage change in consumer prices
6
6
5
5
United States
Percent
4
4
3
3
2
2
1
1
0
UK
0
Japan
-1
-1
-2
-2
-3
Describe the changes in inflation for the 4
countries.
China
-4
-3
-4
What has happened to prices in Japan?
-5
-5
00
Tutor2u & Mrs G
01
02
03
04
05
06
08
What implications
are there 07
for consumers
and then Source:
for businesses?
OECD World Economic Outlook
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
Tutor2u & Mrs G
What’s
in the
basket
?
Tutor2u & Mrs G
What’s in the basket?
Tutor2u & Mrs G
What’s in the basket?
Tutor2u & Mrs G
AS Economics
Typical exam Q
How is the RPI or CPI measured….?
Tutor2u &
Mrs G
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.
Tutor2u & Mrs G
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
Tutor2u & Mrs G
CPI
RPI
Tutor2u & Mrs G
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
Tutor2u & Mrs G
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
Tutor2u & Mrs G
The hyperinflation in Weimar Germany led to
employees taking their wages home in larger
wicker baskets
Hyperinflation – Yugoslavia in 1993
Tutor2u & Mrs G
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!
Tutor2u & Mrs G
Hyperinflation
• With hyperinflation - inflation goes out of
control
– Huge amounts of money has to be printed to meet
people’s 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
Tutor2u & Mrs G
Zimbabwe Hyperinflation in 2007…
Tutor2u & Mrs G
And in 2008….
Originally worth $2….but only worth 4 cent
in Jan 2009 before devaluation.
Tutor2u & Mrs G
Most current data
Tutor2u & Mrs G
Zimbabwe removes 12 zeros from
currency – Jan 2009
• One trillion in Zimbabwe dollars now will be equivalent
to one Zimbabwe dollar
• Zimbabwe
Zimbabwe'sswitches
inflation rate officially at 231 million
into
official
percent
as ofmonthly
last July 2008.
deflation
Dec 18 2009
• Many Zimbabwean traders have stopped accepting
local currency
• Acting finance minister recently allowed all
Zimbabweans to use foreign currency
Tutor2u & Mrs G
Consumer Price Inflation in Russia
Russia, Consumer Prices (Annual Percentage Change)
40
35
a result of the
What
effects
do you
collapse
in the
think this
hadofon
external
value
thethe
economy?
rouble
in 1998
30
Percent
25
Think about
each ‘sector’
of the economy
20
15
10
5
0
-5
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: Reuters EcoWin
Tutor2u & Mrs G
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
Tutor2u & Mrs G
An interactive link for Inflation
Tutor2u & Mrs G
Homework
• Revision
Reminder
You have the textbook
exercise to finish for Next
lesson
• You have an assessment NEXT WEEK…on Tuesday.
• Revise…
– Macro Economic objectives
– Circular flow of income
– Measuring National Income
– HDI issues…
Tutor2u & Mrs G
Plenary…
• What is inflation?
• How does the govt measure the general
price level?
• What is deflation?
• What is hyperinflation?
Tutor2u & Mrs G