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MEC152 Tutorial session 4

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MEC152 Tutorial session 4

Uploaded by

Ofentse Racodi
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MEC152 Tutorial session 4

Topic 6: Inflation

(Public Enemy Number One)


Inflation: Definitions

• Inflation: Inflation refers to the general increase in the prices of goods and services in an economy over a
period of time, which reduces the purchasing power of money. It is typically measured as the annual
percentage increase in a price index, such as the Consumer Price Index (CPI).
• Deflation: Deflation is the opposite of inflation, involving a general decline in the prices of goods and
services. This can increase the purchasing power of money but may signal economic trouble, as it is often
associated with reduced demand, lower wages, and higher unemployment.
• Disinflation: Disinflation is the process of slowing the rate of inflation, meaning that prices are still rising,
but at a slower pace than before. It's not a reduction in prices (like deflation), but rather a reduction in the
rate at which prices are increasing.
• Hyperinflation: Hyperinflation is an extremely high and typically accelerating rate of inflation, usually
above 50% per month.
Measuring inflation

Aspect Consumer Price Index (CPI) Producer Price Index (PPI)

Definition Measures the average change in the prices paid by Measures the average change over time in the selling
consumers for goods and services. prices received by domestic producers for their output.

Focus Reflects changes in the cost of living for consumers. Reflects changes in the cost of production for producers.

Target Group Consumers (households). Producers (businesses and manufacturers).

Coverage Includes a wide range of consumer goods and services includes capital and intermediate goods, but excludes
like food, housing, healthcare, and transportation. services (which account for half of the CPI basket).

Use Used to assess inflation from the consumer's Used to analyze inflation from the producer’s perspective
perspective and adjust wages, pensions, and inflation- and as a leading indicator for future consumer price
linked bonds. . inflation.
Causes/ Types of inflation

Demand-pull inflation
▪ occurs when prices are pulled up by increases in
aggregate demand that are not matched by
equivalent increases in aggregate supply.
• occurs when the aggregate demand for goods
and services increases.
▪ an increase in aggregate demand has caused a
rise in the price level from P1 to P2.
▪ Increases in aggregate demand may result from
a consumer expenditure, a rise in government
spending, increase in investment or an increase
in net exports.
Cost-push inflation

• occurs when prices are pushed up by increases in


the cost of production.
• driven by rising production costs leading to
decreases in aggregate supply
Consequences of inflation

1. Reduced Purchasing Power


2. Redistribution of income: Some people may gain, and some people may lose as a result
of inflation.
▪ inflation benefits debtors (borrowers) at the expense of creditors (lenders).
▪ redistribute income and wealth from the elderly to the young.
▪ redistribution from the private sector to the government.
2. Lower economic growth and higher unemployment than would otherwise have occurred.
3. discourage saving
4. A reduction in net exports: Inflation may reduce the international competitiveness of a
country’s products and so increase import expenditure and lower export revenue.
Consequences

5. Menu costs: These affect firms and are the costs involved in changing prices.
6. Discouragement of investment: Unanticipated inflation can create uncertainty and so make
it more difficult for firms to plan. This may dissuade firms from investing, which will harm
economic growth.
7. Inflation causing inflation: Inflation may generate further inflation as consumers, workers
and firms will come to expect prices to rise.
8. Social Unrest: Prolonged inflation can lead to frustration among citizens, especially if their
wages do not keep pace with rising prices. This can result in protests, strikes, or political
instability as people struggle with the increasing cost of living.
10. Increased cost of borrowing
The potential benefits of inflation

• Prevent some unemployment

• Stimulates output
Q &A

Thank you

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