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Inflation Notes

Economics Notes > Macroeconomics Notes

This is an extract of our Inflation document, which we sell as part of our Macroeconomics Notes collection written by the top tier of Wallington High School For Girls students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Macroeconomics Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

MEASURE OF ECONOMIC PERFORMANCE ii.) INFLATION A sustained increase in the general price level (prices of products across the economy) in a given time period. OR A sustained fall in the purchasing power of money. DISINFLATION - inflation continues at a slower rate DEFLATION - sustained decrease in the general price level in a given time period

Calculating Inflation:

1. Consumer Price Index (CPI) - calculated since 1995; took over as the main measure in 2003
- CPI + 2% = Bank of England inflation Target

2. Retail Price Index (RPI) - calculated since 1947; still used for the purpose of indexation of pensions, benefits and tax allowances Index Construction

* Both indices represent the changes in prices across a wide range of consumer purchases.

* They are like the contents of two enormous shopping baskets.

* Each month 120,000 prices for over 650 items from 150 UK locations are collected to update the indices.


A weight is given to each item in the baskets to reflect its importance in the 'typical household budget'

Inflation Rate: A measure of the percentage change in the index compared to the same month one year previously. OR A measure of the annual percentage change in the level of consumer prices.

Curves Showing Inflation:



Aggregate Demand (AD) + Aggregate Supply (AS) Curves The Phillips Curve - a combination curve of inflation + unemployment

Causes of Inflation:



1. DEMAND PULL = increases in AD when the economy is operating at or close to full capacity

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