Inflation and its consequences

Cost-push inflation

• Inflation caused by an increased price of factors of production

• Inflation caused by an excess of demand oversupply

• Removes the effects of one-off or volatile price movements

• Primarily imported from overseas

Stagflation is:

• When unemployment falls while inflation rises

• When inflation falls while the economy slows down

• When unemployment and inflation rise simultaneously

• When there is zero inflation within an economy

Hyperinflation:

• The dramatic rise in the price of goods and services in a short period of time, which is controlled by government influences.

• Hyperinflation is a term to describe rapid, excessive, and out of control general price increases in an economy.

• Hyperinflation is a product of excessive aggregate demand.

• Hyperinflation is a regular economic occurrence in an economy, that increases general price of goods and services.

Demand pull inflation is…

• A persistent increase in the average price of goods and services within an economy.

• When aggregate supply outweighs aggregate demand.

• When Aggregate demand outweighs aggregate supply.

• Increases in prices of imported raw materials increase cost of domestic production.

This diagram graphically represents:

• Stagflation

• Disinflation

• Demand-pull inflation

• Cost-push inflation

Excessive inflation impacts savings by…

• Raising the cost of borrowing money.

• Eroding the purchasing power of a currency.

• Lowering the cost of borrowing money.

• Encouraging spending or investment

A limit of CPI as a measurement is

• It does not take into consideration the product quality, new products, product innovations and individual buying habits which can underestimate or overestimate inflation

• It quantifies the aggregate price level in an economy. This measures the purchasing power of a country’s unit of currency which can vary a lot and be inaccurate

• It measures cost of living rather that measuring the changes in consumer prices

• It is measured only quarterly

Excessive inflation impacts international competitiveness by:

• Creating a trade surplus

• Improving a country’s Balance of Payments (BOP) position

• Creating a trade deficit

• Increasing the cost of exports

CPI

• Measures the change in the inflation rate

• Measures changes in the price level of an average market basket of goods and services

• Measures changes in the price level of goods and services

• Measures changes in the price averages of one store

Disinflation

• When the rate of inflation in one quarter is lower than in the previous quarter

• When the rate of inflation goes below 0%

• A slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time

• A sustained decline in the rate of inflation over 1 quarter