inflation

Causes of deflation

Causes of deflation

Readers Question: What is the cause of deflation? Deflation involves a fall in the price level –  a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation:A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology.Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the…

Demand-pull inflation

Demand-pull inflation

Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand.If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation.Inflation – a sustained increase in the price level. Demand-pull inflation – inflation caused by AD increasing faster than AS.Demand-pull inflation means:Excess demand and ‘too much money chasing too few goods.’ The economy is at full employment/full capacity. The economy will be growing at a rate…

Inflation: advantages and disadvantages

Inflation: advantages and disadvantages

Readers Question: what are the advantages and disadvantages of inflation? Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe away the value of savings. However, most Central Banks target an inflation rate of 2%, suggesting that low inflation can have various advantages to the economy. Some economists even argue we should target a higher inflation rate during periods of economic stagnation.

Policies to reduce inflation

Policies to reduce inflation

Inflation is a period of rising prices. Most Central Banks target low inflation. If inflation rises above this inflation target, there are several economic policies, such as monetary policy to reduce the inflation rate.Summary of policies to reduce inflationMonetary policy – Higher interest rates. This increases the cost of borrowing and discourages spending. This leads to lower economic growth and lower inflation. Tight fiscal policy – Higher income tax and/or lower government spending, will reduce aggregate demand, leading…

What is the opposite of shrinkflation?

What is the opposite of shrinkflation?

Shrinkflation occurs when firms reduce the size or quantity of a good and keep prices the same.  Shrinkflation is as an alternative to inflation. Rather than increasing prices you get a smaller quantity. To buy the same quantity you have to spend more. Recently, it has received a lot of press attention, and The OED is now considering adding the word to the OED. As the OED blog states: “Shrinkflation is a portmanteau, made from combining shrink: ‘to become or make smaller in size’, with the economic sense of…

Inflation Targeting Pros and Cons

Inflation Targeting Pros and Cons

Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed level.  Since the 1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods of high inflation which can destabilise an economy. However, since the recession of 2008 and consequent unemployment, people have begun to question the importance attached to inflation targets and are worried that a strict commitment to low inflation…

Different types of inflation

Different types of inflation

Inflation means a sustained increase in the general price level. However, this increase in the cost of living can be caused by different factors. The main two types of inflation areDemand-pull inflation – this occurs when the economy grows quickly and starts to ‘overheat’ – Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS). Cost push inflation – this occurs when there is a rise in the price of raw materials, higher taxes, e.t.c1. Demand-pull inflation This occurs when AD increases at a faster rate than AS….

Shrinkflation

Shrinkflation

  Shrinkflation occurs when firms reduce the size or quantity of a good and keep prices the same. Shrinkflation is an alternative to increasing prices, and you could argue it is a disguised form of inflation because if you wanted to buy exactly the same quantity of the good, you would have to spend relatively more. However, shrinkflation won’t show up in the consumer price index because prices stay the same. Examples of ShrinkflationIn 2009 a Mars bar was reduced in…