Inflation and Types of Inflation

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INFLATION AND TYPES OF INFLATION Md. Nuruzzaman, PhD Director (Training), NAPD *

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*InflationDefinition: Is a steady an upward movement in the level of prices decreasing purchasing power over a period of time, usually one year.

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*Measuring InflationThe Consumer Price Index (CPI) is the official measure of inflation.

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*Measuring InflationThe CPI can be thought of as an imaginary ‘basket’ of selected goods and services bought by a typical capital city household. The CPI is merely a measure of the changes in the price of this basket of goods and services.

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*Measuring InflationThe price of the CPI basket in the base (first) period is given a value of 100 and the prices of subsequent periods are compared against the base year.

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*Measuring InflationFor example, if the price of the basket had increased 15% since the base year, the CPI would read 115, if the price had fallen by 15% since the base year the CPI would be 85.

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*Measuring InflationIt is important to remember that the CPI measures price movements and not actual price levels.

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*Measuring InflationFor example, if the index for beer is 108 and the corresponding index for wine during the same period is 104 it doesn’t mean that the price of beer. Is more expensive than wine.

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*Measuring InflationIt means that the price of beer has increased twice as much as that of wine since the base year.

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*Measuring InflationCompilation of the CPI involves a quarterly survey of a ‘basket’ of goods and services representing a high proportion of household expenditure.

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*Measuring InflationThe basket of goods and services upon which the CPI is based is divided into 8 groups. Which are further divided into a number of sub-groups and then into specific expenditure classes.

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*Measuring InflationThe eight groups of the CPI are as follows: Food Clothing Housing Education and Recreation Transportation Tobacco and Alcohol Health and Personal Care Household Equipment and Operation

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*Measuring InflationTo reflect the importance of each expenditure class in relation to total household expenditure, weight or measure of relative importance to each expenditure class in the CPI, are attached to each item in the index.

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*Measuring InflationWeights are compiled as a result of extensive surveys of patterns of consumption and are revised every 5 years to take account of changes in expenditure patterns.

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*Measuring InflationThe usefulness of an index number in statistics is to allow comparisons of data between one period and another, using a common unit of measurement.

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*Constructing the CPI Index

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*Calculating Inflation Year 2 cost x 100 = Therefore Year 1 cost 1 90 x 100 = 112.5 80 1

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*Calculating Inflation112.5 – 100 (Base Year) = 12.5 % From this we can say over the year, average prices increased by 12.5 %.

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*InflationInflation is a steady and upward movement in the level of prices, decreasing purchasing power, over a given period of time, usually one year.

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*Demand Pull InflationDemand Pull Inflation occurs when Aggregate demand (C+I+G+(X-M)) increases at a rate faster than the capacity of the economy to produce goods and services ie: AD>AS. This increase competition for goods and services drives up their prices.

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*Demand Pull InflationP2P1Q2Q1Aggregate SupplyAggregate Demand 2Aggregate Demand 1Price $Real GDP ($)

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*Demand Pull InflationAn increase in demand shifts the aggregate demand curve to the right, from AD1 to AD2 pushing up the price level from P1 to P2.

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*Sources of Demand Pull InflationAny increase in Aggregate Demand (C + I + G + ( X – M ) ) as the economy approaches full employment.

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*Sources of Demand Pull InflationFull employment causes labour shortages, employers thus bid up wages to attract labour. The increased income, transpires into increased consumption causing Aggregate Demand to rise.

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*Sources of Demand Pull InflationHigh levels of foreign investment increases employment, income, consumptions and ultimately Aggregate Demand.

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*Sources of Demand Pull InflationGrowth in foreign economies can lead to higher incomes for our exporters, thus allowing increases in Aggregate Demand.

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Last Updated: 8th March 2018

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