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Macroeconomic Indicators
Inflation and Deflation
Key terms
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Inflation
Deflation
CPI
Family Expenditure Survey
Cost-push inflation
Demand-pull inflation
Wage-price spiral
Anticipated inflation
Unanticipated inflation
Shoe-leather costs
Benign deflation
Malevolent deflation
• Retail Price Index (RPI)
• Consumer Price Index (CPI)
– Weighted price index
• Relative importance as proportion of spending
• Price index X weighting = weighted price index
Limitations of CPI
• Different population groups experience
different inflation. Not everyone is
‘average’.
• House prices not included but mortgage
repayments influence spending.
• Over-estimate inflation. Prices may not
reflect quality/innovations
Cost Push revisited
• Causes
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Import costs
Labour costs
Indirect tax rises
Wage-price spirals
Demand Pull revisited
Quantity Theory of Money
(Monetarists)
• That an increase in the money supply will lead
to an increase in the price level
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– Fisher equation
– Equation of exchange
M x V = P x T (or MV = PY)
M = Money supply
V = the velocity of circulation
P = general price level
T = Transactions (output)
Y = RNO (real GDP)
• Velocity of circulation
– The number of times a unit of currency
changes hands in a year (to buy goods and
services)
– This is assumed to be constant
– T and Y tend to increase slowly over time,
therefore are also assumed to be constant
– M x V = P x T if V and T (Y) are constant, a
change in M will cause a change in P –
inflation!
Consequences of Inflation
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Competitiveness
Investment
Distribution of income
Industrial relations
Fiscal drag
Hyperinflation
Money illusion
Menu costs
Shoe-leather costs
Inflation and Index numbers
Add the
definitions
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Include a
diagram for
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Note the
micro overlap