Macro: Inflation

Macro: Inflation

1. DEFINITION: constant rise in prices over a given time period.

   • weighted basket system
     • Consumer Price Index (CPI)
   • but shouldn't mortgage payments and indirect tax also be included?

2. DISINFLATION

   • fall in the rate of inflation

3. CORE/ UNDERLZING INFLATION

   • excludes the impact of volatile prices
     • oil and food are goood examples

4. PRODUCER PRICE INDEX (PPI)

   • basket of factores used in production
     • eg. capital, raw material and energy prices
     • gives indication of extent to which SRAS might be affected by price changes

5. CONSEQUENCES OF INFLATION (7)

   • redistribution of income savers vs. borrowers
   • Devaluation of monez/ loss of purchasing power
   • Reduction of investment
   • Reduction of international competitivness
   • potential for wage/price spiral if out of cotrol
   • shoe-lether and menu costs
   • potential wage/price spirals

6. CAUSES OF INFLATION

   • COST-PUSH INFLATION
     • Rising raw material cost
     • Rising labour costs
     • Increased indirect taxation
     • Macro policies are ineffective to cure cost push in short run,
   • DEMAND-PULL INFLATION
     • Reduced taxation
     • Increased government spending
     • Reduced interest rates
     • Rising consumer confidence
     • Economic growth in other countries
     • Depriciation of a country's exchange rate
     • Cure should focus on reducing the rate of growth of AD, in extreme case also reduce national income

7. CURES FOR INFLATION

   • Demand side
     • Monetary Policy
       • an increase in intrest rates
     • Fiscal Policy
       • reducing government spending and/or incresing direct taxation
   • Supply side
     • Policies to increase the total supply of goods and services by an economy

8. DEFLATION

   • DEFINITION; constant fall in prices over a given time period
   • Demand-side
     • DAngerous tzpe of deflation and is caused by a fall in AD linked to a time of recession
     • Delayed consumption causes further inflation
   • Supply-side
     • lower commoditz and oil prices
     • lower wages
     • lower indirect tax
     • desirable

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