Inflation

Question 1

Process of calculating CPI

Answer 1

• Calculated by tracking the price movements of 650 items, which represent a basket of goods and services typically bought by the average UK household, the goods are all weighted and the basket is updated annually to keep it representative, and prices are checked on a monthly basis, by recording prices at outlets across the UK.

Question 2

Limitations of CPI use

Answer 2

• Basket may become outdated, doesn’t adapt to seasonal changes
• Doesn’t measure price changes in rural/ remote areas
• CPI does not take into account the differences in spending patterns between individual households.
• Doesn’t account for changes in quality of goods
• Substitutability of goods - doesn’t account for consumers switching to cheaper alternatives when prices rise.

Question 3

What is the RPI

Answer 3

Same method but more outdated, tends to overstate the level of inflation, not used anymore. Calculated by the ONS

Question 4

Effects if inflation on workers

Answer 4

• Regressive impact on lower income workers as redistribution of income is worse as utility prices go up
• Falling real incomes, especially for workers with low wage bargaining power.
• Businesses could become less competitive = more shutdowns and redundancies
• Business uncertainty could mean cut costs = cut labour costs
• Less FDI = less employment opportunities

Question 5

On consumers

Answer 5

• prices go up
• lower CC
• savers lose value
• debtors benefit
• retired on fixed incomes finished

Question 6

On firms:

Answer 6

• business and CC down so less revenue + investment
• profit depends on if prices rise faster than costs
• make exporting businesses less IC
• business uncertainty

Question 7

On governments

Answer 7

• lower consumer spending + business investment and revenues = lower tax revenues
• trade balance from exports becoming internationally uncompetitive
• welfare benefits spending to help the unemployed - where is money sourced from?