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Inflation & Deflation
- 1. Macroeconomics by: Shadi A. Razak 1 Inflation and Deflation
- 2. Objectives • Understand what inflation and deflation means • Explain how we measure inflation • Discuss the causes and consequences of inflation and deflation • Explain governments and Firms behaviour during inflation and deflation by: Shadi A. Razak 2
- 3. Structure • Inflation • Consumer Price Index • Causes of Inflation • Impacts of Inflation • Deflation by: Shadi A. Razak 3
- 4. Tale of two economies by: Shadi A. Razak 4 INFLATION
- 5. Introduction • Inflation is a sustained increase in the cost of living or the general price level leading to fall in purchasing power • The annual percentage change in consumer prices is used to measure inflation • Central Banks are sought to develop policies to control inflation rate by: Shadi A. Razak 5 INFLATION
- 6. by: Shadi A. Razak 6 INFLATION
- 7. Overview by: Shadi A. Razak 7 INFLATIONCONSUMER PRICE INDEX • Consumer Price Index (CPI) is used to measure inflation • CPI consist of a representative basket of goods and services used, each item is weighted in accordance to its importance in people expenditure • Weights are multiplied by price changes before the weighted changes are totalled to measure inflation
- 8. by: Shadi A. Razak 8 INFLATIONCONSUMER PRICE INDEX
- 9. Limitations by: Shadi A. Razak 9 INFLATIONCONSUMER PRICE INDEX • CPI not fully representative • Spending patterns • Housing cost • Changing quality of goods and services • New products and services
- 10. Main Causes by: Shadi A. Razak 10 INFLATIONCONSUMER PRICE INDEX • Demand Pull Inflation • Cost Pus Inflation • Administrated Prices CAUSES OF INFLATION
- 11. Main Causes by: Shadi A. Razak 11 INFLATIONCONSUMER PRICE INDEX • Demand Pull Inflation – Caused by excess aggregated demand – Linked to money and credit boom – Economy experiencing an inelastic aggregated supply – Aggregated demand is bigger than the gross domestic production CAUSES OF INFLATION
- 12. Demand Pull Inflation by: Shadi A. Razak 12 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATION Sourcefromtutor2u
- 13. Main Causes by: Shadi A. Razak 13 INFLATIONCONSUMER PRICE INDEX • Cost Push Inflation – Rising salaries – Increase in domestic and overseas raw materials cost – Fall in exchange rate – Increase in products and components import cost CAUSES OF INFLATION
- 14. Cost Push Inflation by: Shadi A. Razak 14 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATION Sourcefromtutor2u
- 15. Main Causes by: Shadi A. Razak 15 INFLATIONCONSUMER PRICE INDEX • Administrated Prices – Changes in regulated prices – Changes in subsidies and taxes CAUSES OF INFLATION
- 16. Internal Causes by: Shadi A. Razak 16 INFLATIONCONSUMER PRICE INDEX • Higher labour cost • Rise in business taxes • Boom in credit supply • Gush in property prices CAUSES OF INFLATION
- 17. External Causes by: Shadi A. Razak 17 INFLATIONCONSUMER PRICE INDEX • Depreciation in exchange rate • Increase in Oil and gas prices • High inflation in other countries • Global inflations in commodity prices CAUSES OF INFLATION
- 18. Inflation Difficult to Forecast by: Shadi A. Razak 18 INFLATIONCONSUMER PRICE INDEX • Unpredictable global energy prices • Changes in currency value • Changes in government taxes • Uncertain AD growth • Unpredictable food prices CAUSES OF INFLATION
- 19. Inflation Difficult to Forecast by: Shadi A. Razak 19 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATION Source from Bank of England
- 20. Impact of High Inflation by: Shadi A. Razak 20 INFLATIONCONSUMER PRICE INDEX • Inequality • Falling real incomes • Negative real interest rates • Increasing cost of borrowing • Wages inflation • Reduced competitive advantage CAUSES OF INFLATIONCONSEQUENCES OF INFLATION
- 21. Impacts of High Inflation by: Shadi A. Razak 21 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATION Inflation can lead to changes in real incomes wealth distribution Winners • Workers with strong wages • Debtors with negative real interest rates • Producers when price rise faster than cost Losers • Retired on fixed income • Leaders with negative real interest rates • Workers on low paid job • Savers with negative real returns
- 22. Impact of High Inflation by: Shadi A. Razak 22 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATION Inflation Tighten the country fiscal policy Change the monetary policy Affect supply side policies Change public sector controls Change administrated prices
- 23. by: Shadi A. Razak 23 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATION Sourcefromtutor2u
- 24. Price Deflation by: Shadi A. Razak 24 INFLATIONCONSUMER PRICE INDEX • Deflation is a insistent fall in the general price level of goods and services • Deflation shows as a negative inflation rate CAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATION
- 25. Causes of Deflation by: Shadi A. Razak 25 INFLATIONCONSUMER PRICE INDEX • Deflation can be caused from: – Demand side • Deep fall in AD leading to a persistent recession • Large negative output gap – Supply side • Improved productivity • Technology advance • Exchange rate appreciation • Very law cost labour CAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 26. Causes of Deflation by: Shadi A. Razak 26 Source from tutor2u INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 27. Consequences of Deflation by: Shadi A. Razak 27 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES Avoid deflation Low interest rate & Cheaper loans Expand credit supply in banking system Fiscal Stimulation Increase government spending Stimulate demand Increase taxes on saving
- 28. Tale of Japan by: Shadi A. Razak 28 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 29. Tale of Japan by: Shadi A. Razak 29 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 30. Tale of Japan by: Shadi A. Razak 30 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 31. Tale of Japan by: Shadi A. Razak 31 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 32. Tale of Japan by: Shadi A. Razak 32 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 33. Tale of Japan by: Shadi A. Razak 33 INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES
- 34. Summary by: Shadi A. Razak 34 • Explained what is meant by ‘Inflation’ and ’ Deflation’ • Differentiated between internal and external causes for inflation and deflation • Discussed how inflation is measures and its limits • Discussed the possible consequences of inflation and deflation INFLATIONCONSUMER PRICE INDEXCAUSES OF INFLATIONCONSEQUENCES OF INFLATIONDEFLATIONCAUSES & CONSEQUENCES