INFLATION

Topics: Inflation, Monetary policy, Macroeconomics Pages: 42 (1885 words) Published: January 31, 2015
Introduction to Macroeconomics
• Key Lesson Objective
• Distinguish between microeconomics and
macroeconomics
• Identify the broad macroeconomic policy objectives
of governments
• Define the terms inflation, deflation and disinflation
• Explain the calculation of the CPI
• Examine the accuracy of the CPI as a measure of
inflation
• Discuss the causes and effects of inflation
• Explain the policies for controlling inflation

Micro and Macro Economics
• Microeconomics is the branch of economics that
concerns itself with the study and behaviour of
consumers and firms and the determination of
market prices and quantities of factor inputs and
goods and services.
• Macroeconomics deals with the study of aggregate
economic activity. It analyses how the economy as a
whole works. It deals with factors that determine
national output, employment, the price level and
total imports and exports

Macroeconomic Policy Objectives
• These are the broad economic policy outcomes that
a government seeks to realise in the management
of an economy. They are:
a. Price Stability (Low Inflation)
b. Full Employment (Low Unemployment)
c. Economic Growth
d. Healthy Balance of Payments
e. Income Redistribution
f. Concern for the Environment

Inflation
Definition:
• Inflation is a persistent tendency for the
general level of prices to rise.
• Inflation is a continuous and persistent rise in
in the general/average price level.
• A sustained rise in the average price of goods
and services.
• This is when prices rise at and increasing rate.

Degrees of inflation
• Creeping Inflation: it occurs when prices rise
gradually over long periods of time.From(2%-3%)
• Hyperinflation/Galloping inflation : this occurs
when prices rise uncontrollably. Above(100%)
• Stagflation : this is a period of simultaneous
economic inflation and business recession eg US
1979-1981.This when there is high inflation and
high level of unemployment.
• Suppressed inflation : this occurs when there is a
tendency for the general price to rise but
governments introduce tough price controls.

Inflation, Disinflation and Deflation
• During inflation, prices are rising at an
increasing rate.
• Disinflation occurs when the rate of increase
in the price level is falling. That is, prices are
rising at a decreasing rate.
• Deflation occurs when the general price level
is falling. That is the percentage change in the
CPI is negative.

Other inflation terms
• The Retail Price Index (RPI)
• This was virtually the only measure available until
the early 80s. The index has no units. It is just a set
of numbers that show the monthly change in the
(weighted) average of a 'basket' of goods and
services.
• The inflation figure that you hear on the news,
therefore, is the annual percentage change in this
index, from the most recent month compared with
the same month in the previous year. It is often
referred to as the headline rate of inflation

RPIX

• The 'X' doesn't actually mean anything. It's just a label, a bit like the x-axis and the y-axis in maths. The inflation
rate calculated from the RPIX is often called
the underlying rate of inflation.
• This is exactly the same as the RPI except that one of the items in the 'basket' of goods and services is taken
out. This item is mortgage interest payments. Although
this is a very important part of most households'
monthly expenditure, the government prefer to quote
inflation as the annual change in RPIX. The reason for
this is the link between the main instrument used to
control inflation (for example, interest rates) and the RPI
itself

RPIY
• This measure takes the RPIX one stage further. This
is the same as the RPIX, but excludes indirect
taxes as well. Again, the items that have been
eliminated are things that the government can
directly change.
• Others argue that rises in indirect taxes cause the
price of a large proportion of the goods and...
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