Inflation

Inflation

1. Inflation is defined as a steady and persistent increase in the general level of prices. It's the rate at which money loses its ability to buy things

2. The Central Statistics Office employs 94 part time price collectors who collect about 53,000 prices in 84 locations throughout the country on the second Tuesday of every month

3. The Consumer Price Index

   • The official measure of inflation in Ireland. It measures the price change of goods and service consumed by all consumers
   • How is the CPI constructed?
     • National Average Shopping Basket: is a selection of the most frequently purchased goods and services
     • Household Budget Inquiry: carried out every five years to ensure index reflects up-to-date purchasing patterns
     • Decide on a Base Year and Find the Prices
     • Prices in the Current Year are Collected
   • Economic Uses
     • Measures the Rate of Inflation
     • Indicator of Country's Performance
     • Used in Wage Negotiations
     • International Comparison
   • What Precautions should be taken when using CPI?
     • Not a Cost of Living Index
     • Lags Behind Consumer Trends
     • Quality Changes in Products
     • It's an Index of the Average Consumer

4. What Factors Cause Inflation?

   • Demand Pull Factors: if aggregate demand is greater than aggregate supply, prices will be forced upwards
     • "Too much money chasing too few goods"
   • Cost Pull Factors: if a company experiences a cost increase in its cost of production, it will probably pass on this increase by raising selling price of final good
     • Increase in Wages
     • Increase in commercial rates
   • Imported Inflation: if imported raw materials rise in price, so does the cost of production for manufacturers, so they increase the selling price of finished goods

5. What Problems are Caused by High Inflation?

   • Lower Standard of Living
   • Wage Demands Increase
   • Increase in Unemployment
   • Loss of International Competitiveness
   • Fixed Income Holders lose out

6. What Remedies are Available?

   • Fiscal Policy (government): increasing direct taxation would reduce demand, as consumers could have less disposable income
   • Monetary Policy (bank): reducing the amount of credit available would reduce demand; increasing rate of interest reduces demand for loans, hence discourage investment

7. Deflation happens when there is a general decrease in average level of prices

8. Benefits of Price Stability

   • Consumers will tend to spend, contributing to economic growth
   • Gov. revenue could increase with more taxes being collected
   • Demand for wage increases wouldn't be as urgent

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