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INFLATION

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Todd Cota

on 7 June 2015

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Transcript of INFLATION

INFLATION
design by Dóri Sirály for Prezi
1) LOSS OF PURCHASING POWER
fall in real income
protection through COLA (Costs of Living Allowance)
2) EFFECT ON SAVINGS
interest rate vs. real interest rate
3) EFFECT ON INTEREST RATES
nominal vs. real interest rate
4) EFFECT ON INTERNATIONAL COMPETITIVENESS
high inflation = decrease in exports
low inflation = increase in exports
5) UNCERTAINTY
consumer & producer confidence = decreased investment
6) LABOR UNREST
high inflation = increased disputes = increased strikes


A persistent fall in the Average Price Level of G&S measured through the CPI.
COSTS OF
INFLATION
CPI BASKET OF GOODS REPRESENTS TYPICAL HOUSEHOLD CONSUMPTION ITEMS
NATIONAL RATE & REGIONAL RATE OF INFLATION DIFFERS
STATISTICAL DISCREPANCIES
TASTES & PREFERENCES (CONSUMPTION PATTERN) CHANGES
INTERNATIONAL COMPARISONS DIFFICULT (DIFFERING METHODS ARE USED)
NON-SUSTAINED CHANGES IN PRICE (SEASONAL)
MORE STABLE TO USE CORE RATE
EXCLUDE FOOD & ENERGY
DOES NOT INCLUDE CHANGES IN PRICE OF FACTORS OF PRODUCTION
TRACKING COST-PUSH INFLATION COULD HELP IN PREDICTIONS IN UPCOMING PRICE CHANGES IN G&S
CHALLENGES WITH MEASURING INFLATION
DEFLATION
1) UNEMPLOYMENT
A decrease in prices may lead to a decrease in AD as consumers wait to purchase at even lower prices.
decrease in AD = increase in unemployment
could cause deflationary spiral
2) EFFECT ON INVESTMENT
lower prices = decrease in firm revenue or profit = decrease in confidence = increase in layoffs of workers = decrease in Investment
3) COSTS TO DEBTORS
can cause difficulty in paying back loans = value of debt increases
INFLATION MEASUREMENTS
Consumer Price Index (CPI) or Retail Price Index (RPI)
A measurement of a basket of G&S over time.
Includes thousands of items
categories are given a weight according to importance

HOW IS INFLATION MEASURED?
A persistent increase in the Average Price Level of Goods & Services, measured through the Consumer Price Index (CPI).
GOOD DEFLATION:
Supply-Side issue, caused by an increase in the Q&Q of the FOP -(Increased Productivity), often resulting in a decrease in the APL & an increase in real output; causing a decrease in unemployment.
BAD DEFLATION:
Demand-Side issue, caused by a fall in AD, resulting in a decrease in the APL & decrease in real output; causing an increase in unemployment.
A slowing in the rate of inflation, describes when the inflation rate has been marginally reduced over the short-term -- periods of slowing inflation in the short-term, disinflation should not be confused with deflation.


WHAT IS DISINFLATION?
WHAT IS INFLATION, DEFLATION & DISINFLATION?
INFLATION:
A rise in the average level of prices of G&S in an economy, over a period of time.
When the average price level rises, each unit of currency buys fewer G&S.
Reflects a decrease in the purchasing power of money.
DISINFLATION:
A decrease in the rate of inflation.
A slowdown in the rate of increase of the average price level of G&S over a period of time.
example: If the annual inflation rate for the month of March is 6% and it is 5% in the month of April, the prices disinflated by 1% but are still increasing at a 5% annual rate.
DEFLATION:
Deflation is a decrease in the average price level of G&S.
Occurs when the inflation rate falls below 0%.
https://www.ecb.europa.eu/ecb/educational/inflationisland/html/index.en.html
TIME TO PLAY... INFLATION ISLAND

DIRECTIONS:
COPY & PASTE THE LINK BELOW & LOAD THE GAME
NAVIGATE THROUGH EACH OF THE DISTRICTS WITHIN INFLATION ISLAND. NAVIGATE THROUGH THE SITE TO VIEW THE CAUSE & EFFECTS OF;
DEFLATION
PRICE STABILITY
INFLATION
HYPERINFLATION
GO TO THE CINEMA AND WATCH THE FOLLOWING VIDEOS.
DEFLATION IN JAPAN SINCE 1995
1 OF THE VIDEOS ON HYPERINFLATION
DRAW A GRAPH REPRESENTING THE TYPE(S) OF INFLATION REPRESENTED IN THE VIDEO
PROVIDE A 1/2 PAGE ANALYSIS OF THE GRAPH

EXTRA CREDIT OPPORTUNITY (3 MARKS)
CAUSES OF INFLATION
1) DEMAND-PULL INFLATION
Due to an increase in AD by consumers

2) COST-PUSH INFLATION
Due to an increase in the cost of production by firms

3) DEMAND-PULL & COST-PUSH COMBINED
Due to an increase in AD & costs of production

4) EXCESS MONETARY GROWTH
Due to an excess increase in supply of money by government



DEMAND-PULL INFLATION
Caused by changes in AD
income
interest rates
wealth
consumer confidence
household indebtedness
interest rates
national income
technological changes
business confidence
government spending
COST-PUSH INFLATION
Caused by changes in:
wage-push inflation
increase in labor costs
commodities-push inflation
price of imports (capital, components & raw materials
import-push inflation
government indirect taxes or subsidies
INFLATIONARY SPIRAL
Caused by an increase in AD, when economy is near Yf
increase in costs of production
increase in costs of inputs
contraction of SRAS
labor negotiates for higher wages
increase in households wealth perception
increase in AD

EXCESS MONETARY GROWTH

"Inflation is always and everywhere a monetary phenomenon." Milton Friedman
Caused by excess money supply via the government
monetary policy
fiscal policy
GOVERNMENT POLICIES TO REDUCE OR CONTROL INFLATION
Demand Side policies-to control demand pull inflation
Deflationary fiscal policy:
increase in taxes & decrease in government spending. Increasing taxes will result in lower disposable income for household and thus less consumption. Moreover, increased taxes will result in lower profits for firms and thus less investment by firms.
Deflationary monetary policy:

Raising interest rates & reducing money supply. Higher interest rates mean higher loan and mortgage repayments. This will deter households and firms to borrow, leading to fall in consumption and investment respectively.
Supply side policies-to control cost push inflation:
Policies aimed at improving efficiency of producing G&S

Privatization
Create Independent Central Bank
explicit (official) or implicit (informal) inflation target rate
Decrease or remove government barriers (deregulation)
Exchange rate policies to control imported inflation
Increasing the value of domestic currency to reduce imported inflation.
Increase currency rate could lead to fall in demand for exports.
ARGENTINA'S RUNAWAY INFLATION
(March 7, 2015 - Bloomberg Press)
Inflation of 40 percent is the biggest economic challenge Argentina faces, presidential hopeful Sergio Massa said. “With 40 percent inflation nothing is sustainable,” Massa said in an interview. “I didn’t come here for a photo opportunity on a parade float. I came to speak with producers.”
A man in the crowd at the Hyatt hotel in downtown Mendoza held a sign that said “bankrupt producer.”
‘Wake Up’
While consumer prices rose 24 percent in 2014, according to the government, private estimates place the figure at almost 40 percent. The official peso rate weakened 23 percent in 2014, mainly due to a 19 percent devaluation in January 2014. A black market for the currency trades at about 12.8 compared with the official rate of 8.76.
Casamiquela said a devaluation isn’t the answer. He called for more negotiations between the government and producers to ride out the difficult times, while saying demand for Argentine products abroad, especially grapes & wine has waned.
Massa said no government subsidies could keep provincial governments solvent.
“I listened to the minister and governor and my thoughts were ‘Wake up, it’s the inflation,’” Massa told reporters. “They don’t realize that provinces can’t stay afloat with inflation of 30 percent to 40 percent.”

WHICH COSTS OF INFLATION ARE REPRESENTED IN THE VIDEO?
WHAT IS THE CPI, PPI RPI & GDP DEFLATOR
CPI: Consumer Price Index
Measures producers inflation.
Measures the difference between the total value of the basket of goods purchased by urban consumers current purchase, with the total value of the same basket of goods compared from a base year, (e.g. 2010).
PPI: Producer Price Index
Measures producers inflation.
Includes G&S purchased by producers as inputs into value-added goods or as investment
An early inflationary warning since an increase in prices of raw materials to producers to create their final value-added good, affects wholesale price.
RPI: Retail Price Index
Similar to the CPI, excluding the richest 4% of Households & pensioners who rely on state benefits for at least 75% of their income.
GDP Deflator:
Measures national inflation
The value of a basket of goods, services and final products, produced by the entire nation.
A broader measure of the overall change in price than the CPI and the PPI.
Full transcript