Notesale: Turn your study into money

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Inflation + Deflation
Inflation
- Sustained increase in APL
- Fall in purchasing power
- Disinflation = decrease rate of inflation
- Demand side AD shift right: lower tax, increase C + I; increase G, increase net X
- Supply side LRAS shift up but 𝑌𝑓𝑒 constant: higher CoP (tax, wages, raw materials);
WPIDEC (imported cost-push inflation)
∑ 𝑝𝑟𝑖𝑐𝑒 × 𝑤𝑒𝑖𝑔ℎ𝑡

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Measured by Consumer Price Index (CPI) =

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Retail Price Index: main indicator until 2013 (‘headline rate’) – broader measure
RPIX: underlying rate = RPI – mortgage interest costs
RPIY: change of indirect taxes
Limitations of measures:
o RPI/CPI doesn’t account to change of quality of goods
o Do not show regional variations in price
o CPI doesn’t include mortgage cost which are important part of inflation (UK
high level of home ownership)
o Does not represent spending patterns (current basket of goods underestimate
true rate as not change quick enough to match tastes)
o Does not show individual consumer preference
Problems of inflation:
o Lower standard of living
o Wages don’t rise as fast as inflation
o Savings eroded
o Purchasing power of wages + savings fail

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∑ 𝑤𝑒𝑖𝑔ℎ𝑡

: 2% (±1%) target

o Price competitiveness of exports eroded (↓BoP)
o Redistribution (lenders worse off borrows better off)
Inflating incomes push tax-payers into higher tax brackets, ie
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Malign or benign?
2
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How stable inflation
4
...
Size/type



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