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By the end of this unit well cover

Today well lookat.
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Key Issues

The meaning of inflation

Measuring the general price level

Deflation and hyperinflation

Current trends in UK Inflation

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Defining inflation

Inflation is a sustained increase in the average pricelevel of a country.

The rate of inflation is measured by the annualpercentage change in the level of prices asmeasured by the consumer price index.

A sustained fall in the general price level is calleddeflation in this situation, the rate of inflation becomesnegative.

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BBC clip on 2009 inflation
http://www.tutor2u.net/http://www.tutor2u.net/http://news.bbc.co.uk/1/hi/uk/7895819.stmhttp://www.tutor2u.net/

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What has happenedto the CPI over the

5 years?

Any evidence of

DEFLATION overthis period?

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Dec 2009 Inflation data What effects do youthink these changes

had on the economy?
http://www.tutor2u.net/http://www.tutor2u.net/http://www.statistics.gov.uk/pdfdir/cpi0110.pdfhttp://www.tutor2u.net/

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Annual percentage change in consumer prices

Consumer Price Inflation in Selected Countries

Source: OECD World Economic Outlook

00 01 02 03 04 05 06 07 08

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Percen

t

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

UK

Japan

China

United States

Describe the changes in inflation for the 4countries.

What has happened to prices in Japan?

What implications are there for consumers

and then for businesses?
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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 morethan 600 separate goods and services for which pricemovements are regularly measured in 146 areas

throughout the UK

Some 130,000 separate price quotations are used eachmonth in compiling the index, which is published eachmonth

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Whats

in thebasket

?

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Whats in the basket?

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Whats in the basket?

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AS Economics

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Mrs G

Typical exam Q

How is the RPI or CPI measured.?
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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 atypical household.

The Inflation Rate

The annual percentage in the consumer price index.

This is calculated relative to an arbitrary base yearset equal to 100.

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The consumer price index

The consumer price index is the mainmeasure of inflation for the UK

The government has set the Bank of England atarget for inflation (using the CPI) of 2%

The aim of this target is to achieve a sustainedperiod of low and stable inflation

Low stable inflation is also known as pricestability

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CPI

RPI

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Hyper inflation

A Bank of England employeepictured in the 1920s with a20 million deutschmark note

whose purchasing powerequated to a box of matches

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Hyper inflation

A Bank of England employeepictured in the 1920s with a20 million deutschmark note

whose purchasing powerequated to a box of matches

The hyperinflation in Weimar Germany led toemployees taking their wages home in largerwicker baskets

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Hyperinflation Yugoslavia in 1993

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Yugoslaviathe true impact

Between January 1, 1991 and April 1, 1998, the dinarwas officially devalued 18 times (three of whichexceeded 99%), and 22 zeros were lopped off that unitof 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. Thentry to buy something!

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Hyperinflation

With hyperinflation - inflation goes out ofcontrol

Huge amounts of money has to be printed to meetpeoples 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 tobe created

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Zimbabwe Hyperinflation in 2007

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And in 2008.

Originally worth $2.but only worth 4 centin Jan 2009 before devaluation.

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Most current data

Zi b b f

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Zimbabwe removes 12 zeros fromcurrency Jan 2009

One trillion in Zimbabwe dollars now will be equivalentto one Zimbabwe dollar

Zimbabwe's inflation rate officially at 231 millionpercent as of last July 2008.

Many Zimbabwean traders have stopped accepting

local currency

Acting finance minister recently allowed allZimbabweans to use foreign currency

Zimbabwe switchesinto official monthlydeflationDec 18 2009
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Consumer Price Inflation in RussiaRussia, Consumer Prices (Annual Percentage Change)

Source: Reuters EcoWin

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Percent

-5

0

5

10

15

20

25

30

35

40

a result of thecollapse in the

external value of therouble in 1998

What effects do youthink this had on the

economy?

Think abouteach sector

of the economy
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Costs and Consequences of Inflation

Money loses its value and people lose confidence inmoney 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 theirliving standards. This is known as a wage-price spiral.

Consumers and businesses on fixed incomes lose outbecause the their real incomes falls - employees in poor

bargaining positions lose out

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An interactive link for Inflation
http://www.tutor2u.net/http://www.tutor2u.net/http://www.guardian.co.uk/business/interactive/2009/mar/24/rpi-inflationhttp://www.tutor2u.net/

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Homework

Revision

You have an assessment NEXT WEEKon Tuesday.

Revise

Macro Economic objectives

Circular flow of income

Measuring National Income HDI issues

ReminderYou have the textbook

exercise to finish for Nextlesson

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Plenary

What is inflation?

How does the govt measure the general

price level? What is deflation?

What is hyperinflation?

Documents

04.1 Inflation[1]