Economics Notes: Inflation
1. What is Inflation?
A sustained increase in the general price level of goods and services.
2. Measuring Inflation
Consumer Price Index (CPI): Measures average price changes for a
basket of goods/services.
Retail Price Index (RPI): Similar to CPI but includes housing costs.
3. Types of Inflation
Demand-Pull Inflation:
oCaused by excessive demand in the economy.
Cost-Push Inflation:
oCaused by rising production costs (e.g., wages, raw materials).
Built-in Inflation:
oResult of wage-price spirals.
4. Effects of Inflation
Reduces purchasing power
Hurts savers, helps borrowers
Creates uncertainty
Can affect competitiveness
5. Controlling Inflation
Monetary Policy: Increase interest rates
Fiscal Policy: Reduce government spending/increase taxes
6. Deflation
A sustained fall in price levels
Can lead to lower growth and higher unemployment
