2. Link to Economics specification
Page 12, section 2.1.2

3. Inflation
“a sustained increase in the general price level leading to a decrease in the purchasing power of money”
1985
2015
Household income : 10,000/yr
Cost of Living: 10,000/yr
Household income: 30,000/yr
Cost of Living: 30,000/yr
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4. Inflation – who wins and loses?
Gemma has money in the bank earning 1% per year

5. Inflation – who wins and loses
Inflation – who wins and loses? Grandparents receive a fixed pension of £200 a week

6. Inflation – who wins and loses
Inflation – who wins and loses? The Government sells a £100 bond that will pay £1 per year for 10 years
HM Treasury
promises to pay the holder of this Bond £100 in ten years time plus £1 interest per year
Elizabeth R.

7. Inflation – who wins and loses?
Fuschia is employed by Iris and earns £350/week

8. Inflation Target
- gov’t has set a target of 2% for inflation – this is deemed the best rate for a stable economy (higher than that and inflation can have negative effects; lower than that can mean a stagnant economy)
As prices rise, the value of money falls – the same money can’t buy as much as it used to.
The Bank of England is charged with the responsibility of controlling inflation

9. A few definitions:
Inflation – sustained increase in the general price level
Deflation – a decrease in the general price level (negative inflation)
Disinflation – a decrease in the rate of inflation (eg. Inflation was 2.5% last month and it is now 2%)

10. Some definitions
Shoe Leather Costs: The additional cost of walking around to find out the cheapest goods because prices are not stable (and therefore cannot be compared). Also transactions may take longer due to price negotiation
Menu Costs: The additional costs of constantly changing the menu prices / shelf prices etc

12. Off to get a loaf of bread…

13. No one wants our currency….

14. Measuring Inflation: Consumer Prices Index
Food and Living Costs Survey – find out what households spend their money on (average basket of goods – approx – basket updated annually)
Weights Determined – goods that we spend a higher proportion of income on get more importance in the basket
Prices Checked – from stores across the UK
Weights Applied – price changes multiplied by the weight of that item
Total CPI – weighted price changes are totalled to give this month’s figure for price inflation
Why is it important to adapt the basket of goods regularly?

15. Measuring Inflation: Consumer Prices Index
The rate of inflation is measured by the annual percentage change in consumer prices. The cost of living is a measure of changes in the average cost for a household of buying a basket of different goods and services.

16. Calculating CPI Product Weight Price Change Weighted Price Change Fuel
10% X
+ 20% =
+ 2%
Food
25%
- 10%
- 2.5%
Motoring 5% 0%
Leisure
20%
+ 5%
+ 1%
Clothing
+ 6%
+ 0.6%
Housing
30%
+ 1.5%
100%
Total CPI:
+ 2.6%

17. CPI calculation exercise:
Food: +2%
Alcohol, tobacco: +6.1%
Clothing: -0.5%
Housing, utilities: +2.2%
Furniture & household: 1.7%
Health: +2.4%
Transport: +2.5%
Communication: +3.4%
Recreation: +1.2%
Education: +3.2%
Restaurants, hotels: +3.0%
Misc: +2.3%

18. Other Measures of Inflation
RPI – slightly different contents of basket & method of measurement includes mortgage interest payments, excluded from CPI - excludes richest households & pensioners - uses an arithmetic mean – CPI uses a geometric mean
PPI – Producer Price Index – costs faced by producers (a leading indicator of RPI)