ECON101 S2ML5 Inflation HO.pdf - ECON101B 2015‐16...

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ECON101B 2015161PRINCIPLES OF ECONOMICSInflationS2 ML5DEPARTMENT OF ECONOMICS1Define inflation and how it is measured;Explain the quantity theory of money;Interpret the effect of monetary policy in terms of the quantitytheory of money;Explain the Fisher equationBy the end of this lecture, you will be able to:2Learning objectivesWhat is inflation?3It is distinct from a rise in the price of a particular good or serviceIndividual prices rise and fall all the time in a market economy, reflectingconsumer choices and preferences, and changing costsThe inflation rate (π) is a measure of the average change in prices acrossthe economy over a specified period (most common a year)This is calculated by comparing the prices for the latest month with thesame month a year ago – the 12month inflation rateInflationis the increase in overall price level in the economyWhen overall price level is falling, it is calleddeflationAt its worse, inflation becomeshyperinflation– an inflation rate of 50%a month or higher
ECON101B 20151624Measuring inflationThe rate of which the prices of goods and services rise and fall is animportant indicator of how the UK economy is performingONS produces a range of price indicesThe indices are used in many ways by the government, businesses, andsociety in generalThey can affect interest rates, tax allowances, wages, state benefits,pensions, maintenance, contracts and many other payments5Producer Price Indices(PPI) measure the prices of goods bought andsold by UK manufacturers (manufacturers charge other businesses)Service Producer Price Indices(SPPIS) do similar job for the serviceindustryPrice indicesRetail Price Index(RPI) is the longest standing general purpose domesticmeasure of inflation in the UKavailable continuously from June 1947Consumer price index(CPI) is the main price index entering themeasure of consumer price inflation; it is produced to internationalstandards and in line with European regulations. It is used in thegovernment’s target for inflation, uprating pensions, wages andbenefits and can aid in the understanding of inflation on familybudgets. CPI replaced RPI as the headline measure of inflation in 20036CPI: milestonesFirst published in 1997 as the Harmonised Index of Consumer Prices(HICP). The HICP was developed across the European Union (EU) for thepurpose of acting as a consistent measure of inflation used by theEuropean Central Bank in assessing price stability in the EU membercountriesIn 2003, the National Statistician decided the name of the UK version ofthe HICP would change to the CPI in all National Statistics publicationsSince 2003 it has been used for the Government’s inflation target thatthe Bank of England is required to achieve
ECON101B 2015163

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