Economics Definitions Inflation

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Inflation

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A rise in the general price level, and a fall in the purchasing power of money.

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Deflation

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Price deflation is when the rate of inflation becomes negative so the general price level is falling but the value of money is increasing.

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Disinflation

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Disinflation describes a fall in the inflation rate, whilst still positive means that prices are still rising just less quickly.

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Inflation rate

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The percentage increase in the general price level, usually measured as a yearly comparison.

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CPI

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The Consumer Price Index is the official measure of inflation. It measures the price level of a representative basket of goods and services. Individual items are weighted and constructed into an index using a geometric mean. The CPI does not include housing costs within the index.

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RPI

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The Retail Price Index was previously the official measure of inflation and is measured using the broadly same approach as the CPI. The RPI includes a range of housing costs and is constructed into an index using a arithmetic mean. The RPI is typically higher than the CPI.

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Menu costs

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Menu costs are the costs to a girl resulting from changing prices required when inflation exists. The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the costs of changing nominal prices in general.

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Shoe leather costs

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Shoe leather costs refers to the cost of time and effort (opportunity cost of time and energy) that people spend trying to counter act the effects of inflation such as holding less cash.

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Opportunity cost

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Cost push inflation

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Cost push inflation is inflation caused by an increase in price of inputs. For example the increasing cost of labour or raw materials E.G increasing price of oil.

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Demand pull inflation

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Demand pull inflation is asserted to rise when AD outpaces AS. E.G could be caused by increased consumer confidence increasing consumer spending.

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Quantity theory of money

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The theory proposes a positive relationship between changes in the money supply and the long term price of goods. It states that increasing the amount of money in the economy will eventually lead to an equal percentage rise in the price of products and services.

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Positive relationship

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Index

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An index is a series of numbers, with a base year usually represented by the number 100, which allows easy comparison of data against that base year.

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Price survey

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The ONS survey the price of around 700 items each month. Many are measured in several places, so 110,000 prices are collected in total from 20,000 shops in the UK, with another 70,000 prices measured online. 700 Items and services. Price data is collected monthly.

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Representative basket of goods and services

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This is a relatively fixed set of around 700 consumer goods and services, the prices of which are tracked to measure inflation. The goods in the basket are adjusted annually to account for changes in consumer habits. Items in the basket are identified using the living costs and food survey.