Low and stable inflation Contents
By the end of this section you should be able to:
- Distinguish between inflation, disinflation and deflation.
- Explain that inflation and deflation are typically measured by calculating a consumer price index (CPI), which measures the change in prices of a basket of goods and services consumed by the average household.
- Explain that different income earners may experience a different rate of inflation when their pattern of consumption is not accurately reflected by the CPI.
- Explain that inflation figures may not accurately reflect changes in consumption patterns and the quality of the products purchased.
- Explain that economists measure a core/underlying rate of inflation to eliminate the effect of sudden swings in the prices of food and oil, for example.
- Explain that a producer price index measuring changes in the prices of factors of production may be useful in predicting future inflation.
- Discuss the possible consequences of a high inflation rate, including greater uncertainty, redistributive effects, less saving, and the damage to export competitiveness.
- Discuss the possible consequences of deflation, including high levels of cyclical unemployment and bankruptcies.
- Types and causes of inflation
- Explain, using a diagram, that demand-pull inflation is caused by changes in the determinants of AD, resulting in an increase in AD.
- Explain, using a diagram, that cost-push inflation is caused by an increase in the costs of factors of production, resulting in a decrease in SRAS.
- Evaluate government policies to deal with the different types of inflation.
- Construct a weighted price index, using a set of data provided.
- Calculate the inflation rate from a set of data.
- Discuss, using a short-run Phillips curve diagram, the view that there is a possible trade-off between the unemployment rate and the inflation rate in the short run.
- Explain, using a diagram, that the short-run Phillips curve may shift outwards, resulting in stagflation (caused by a decrease in SRAS due to factors including supply shocks).
- Discuss, using a diagram, the view that there is a long-run Phillips curve that is vertical at the natural rate of unemployment and therefore there is no trade-off between the unemployment rate and the inflation rate in the long run.
- Explain that the natural rate of unemployment is the rate of unemployment that exists when the economy is producing at the full employment level of output.