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Inflation Indicators

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on 15 January 2015

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Transcript of Inflation Indicators

Measuring Inflation
Objectives
To understand the process of calculating the rate of inflation in the UK.
To interpret index numbers and base periods.
To compare different measures of inflation and their significance.
Definitions
is defined as a sustained general rise in prices and is usually measured year-on-year.
Inflation
Deflation
a fall in the price level
e.g. -3%
Disinflation
a fall in the
rate
of
inflation
Inflation is measured using:
The Consumer Price Index
&
The Retail Price Index
The CPI
The consumer price index is used by the British government to set a target rate of 2% (+ or - 1% both ways)
Calculation
Surveyors are sent out to record the prices of around 700 selected items throughout the country which comprise a representative 'basket of goods'. A wide range of outlets and locations are surveyed.
The Family Expenditure Survey
is used to weight the goods with the share of household budget which is spent on them. This reflects the importance of the items from the survey.
Recent Changes to the 'Basket of Goods'
CPI and the RPI
The RPI includes changes to housing costs such as mortgage repayments.
RPI is usually higher than CPI although not always.

In 2008 CPI was higher than RPI
There are only three goods in the basket and their weighting is as follows:
Whose Inflation Rate?
500/1000
300/1000
200/1000
The price of ham rises by 10%, what is the impact on inflation
(500 x 1)
1000
+
(300 x 1)
1000
+
(200 x 1.1)
1000
= 1.02 = 2% inflation
There are only 3 goods with the following weightings:
Transport
400/1000
Beer
100/1000
Petrol
500/1000
Transport and Beer prices increase by 10%
but petrol falls by 2%. What is the overall effect on inflation?
400 x 1.1)
(100 x 1.1)
(
+
+
(500 x 0.98)
1000
1000
1000
= 1.04 = 4% inflation
The heavier the weight, the greater change will impact the average cost of living
http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-232437
The ONS were deciding on whether to bring RPI more in line with CPI.
They have decided to introduce RPIJ which uses a different calculation formula.
Explain how Consumer Price Inflation (CPI) is measured. Refer to weights in your answer.(4)
1 Mark for explaining weights to show relative importance to households
Any of the below for three marks:
Includes the price survey
Includes the base year
Includes a weighted basket of goods
The data from the expenditure and food survey
CPI excludes housing costs
Recap
Calculating the Consumer Price Index
Surveyors are sent out to record the prices of around 650 selected items throughout the country which comprise a representative 'basket of goods'. A wide range of outlets and locations are surveyed.
180,000 price quotations are gathered in each month
Price Survey
The Family Expenditure Survey
is used to weight the goods with the share of household budget which is spent on them. This reflects the importance of the items from the survey.
The heavier the weight, the greater change will impact the average cost of living
(a) (i) explain how Consumer Price Inflation (CPI) is measured. Refer to weights in your answer.(4)
1 Mark for explaining weights to show relative importance to households

Any of the below for three marks:

CPI excludes housing costs
Includes the price survey
Includes the base year
Includes a weighted basket of goods
The data from the expenditure and food survey
The figures are indexed- which is where they are compared to a base value of 100
e.g.
2010
2011
2012
100
99
102
2% increase in inflation from 2010-12
(a) (i) With reference to Figure 1, explain why it is necessary to regularly update the
CPI basket of goods and services.
(6)
2 of the following reasons (2 + 2 marks) and 2 marks for 1
example
From figure 1.
Ensure that inflation is accurately measured (2 marks)
Avoiding potential biases that might develop over time such as
• the development of new goods and services (2 marks)
• the change in tastes (2 marks)
• the switching away from goods and services that have
risen in price (2 marks)
Ensures long term trends are reflected (2 marks)
Sound definition of CPI (2 marks)
Maximum 4 marks if no example of a trend or change from fig 1
To understand why each of us faces a different inflation rate.

AO1
Whose Inflation Rate?
0.5%
5%
2%
-0.3%
'The inflation rate in Zimbabwe was recorded at 0.54 percent in November of 2013. Inflation Rate in Zimbabwe is reported by the Reserve bank of Zimbabwe.

Inflation Rate in Zimbabwe averaged 1151 percent from 1999 until 2013, reaching an all time high of 66212 percent in December of 2007 and a record low of -7.70 percent in December of 2009.

In Zimbabwe, the inflation rate measures a broad rise or fall in prices that consumers pay for a standard basket of goods.'
If inflation falls from say 5% to 4%
Prices are still rising but less quickly
http://www.ons.gov.uk/ons/rel/cpi/cpi-rpi-basket/2012/index.html

http://www.bankofengland.co.uk/education/targettwopointzero/inflation/whatsInflation.htm

http://www.bankofengland.co.uk/publications/inflationreport/index.htm
http://tutor2u.net/economics/revision-notes/as-macro-inflation.html
http://tutor2u.net/economics/revision-notes/as-macro-using-index-numbers.html
http://www.tutor2u.net/economics/presentations/a2economics/macro/Inflation/default.html
http://www.tutor2u.net/economics/presentations/a2economics/macro/InflationTargets/default.html


The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier. It indicates changes to our cost of living


So if the inflation rate is 3% in January, for example, prices are 3% higher than they were 12 months earlier. Or, to look at it another way, we need to spend 3% more to buy the same things

The ONS:
"In principle, the basket should contain all consumer goods and services purchased by households, and the prices measured in every shop or outlet that supplies them.

In practice, both the CPI and RPI are calculated by collecting a sample of prices for a selection of representative goods and services in a range of UK retail locations.

Currently, around 180,000 separate price quotations are used every month in compiling the indices, covering approaching 700 representative consumer goods and services for which prices are collected in around 150 areas throughout the UK."
http://www.neighbourhood.statistics.gov.uk/HTMLDocs/dvc140/index.html
Using index numbers is a quick way to compare changes in prices and quantities to a base value.
The base value is given the value of 100 and an index number expressed as 100 times its ratio.
e.g.
Clothing
Transport
96
100
Food
104
In
In each of these cases, the item has not been added because spending has increased or because the product is new on the market.

It is purely as part of the rebalancing of the basket to improve its representation of overall price change
Out
Food is 4% higher than transport
Describe the major changes in family expenditure since 2001. What do you think may have caused these changes?
10.13%
0.5%
5%
2%
-0.3%
10.13%
Full transcript