Inflation

INFLATION
“Inflation means that your money won’t buy as

much today as you could yesterday.”
Inflation leads to a decline in the value of money. It

reduces the purchasing power of each unit of
currency.
INFLATION RATE
The inflation rate is the annual percentage change in

the price level.
Inflation is measured by government statistics such

as RPI (retail price index) and CPI (consumer price
index)
COST OF INFLATION
Inflation is seen to have economic costs.
1. Decline in value of savings

2. Uncertainty for business leading to less
investment.
3. A decline in the competitiveness of exports
(if inflation higher than other countries.)
CAUSE OF INFLATION
DEMAND PULL
Demand-pull conditions occur when demand

from consumers pulls prices up.
It is when consumer demand for goods and services

increases so much that it outstrips supply.
DEMAND PULL
If sellers don't raise the price, they will sell

out.
They soon realize they now have the luxury

of hiking up prices. If they do this, they
create inflation.
CAUSES OF DEMAND PULL
1. Growing Economy
2. Discretionary Fiscal Policy
3. Marketing and New Technology
4. Over expansion of Money Supply
Growing Economy
As people get better jobs and become more

confident, they spend more.
As prices rise, people start to expect inflation.

That expectation motivates consumers to
spend more now to avoid future price
increases. That further boosts growth.
Discretionary Fiscal Policy
That's when the government either spends

more or taxes less.
Putting extra money in people's pockets

increases demand and spurs inflation.
Marketing and New Technology
Creates demand-pull inflation for specific

products or asset classes which results to
drive widespread price increases.
For example, Apple uses branding to create

demand for its products. That allows it to
command higher prices than the competition.
Over Expansion of Money Supply
The money supply is not just cash, but also

credit, loans, and mortgages.
When the money supply expands, it lowers

the value of the peso. When the peso declines
relative to the value of foreign currencies, the
prices of imports rise. That increases prices
in the general economy.
Over Expansion of Money Supply
The government can create inflation simply

by printing more cash
COST PUSH INFLATION
It only occurs when there is a supply shortage

combined with enough demand to allow the
producer to raise prices.
FIVE CONTRIBUTORS FOR COST
PUSH INFLATION
1. Wage Inflation
2. Company with ability to create monopoly
3. Natural Disasters
4. Government Regulation and Taxation
5. Lowering of Currency Exchange Rates
ADVANTAGES OF INFLATION
1. Adjustment of wages
2. Deflation
3. Boosts economic growth
4. Adjustment of relative prices
DIS-ADVANTAGES OF INFLATION
1. Fall in real wages

2. Reduces the value of savings
3. Uncompetitive economy
DEFLATION
Deflation occurs when asset and consumer prices

fall over time.
It's an economics term that means you have to

spend more
DEFLATION
In economics, deflation is a decrease in the general

price level of goods and services. Deflation occurs
when the inflation rate falls below 0%.
Inflation reduces the value of currency over time,

but sudden deflation increases it.
DEFLATION
Deflation is negative inflation. When it occurs, the

value of currency grows over time. Thus, more
goods and services can be purchased for the same
amount of money.
DEFLATION
Recession is a business cycle contraction that

occurs when there is a general decline in economic
activity. Recesions generally occur when there is a
widespread drop in spending.
CAUSE OF DEFLATION
DECREASE IN DEMAND
The fall in aggregate demand triggers a decline in

the prices of goods and services. Some factors
leading to a decline in aggregate demand are:
1. Fall in the money supply

2. Decline in confidence
FALL IN MONEY SUPPLY
A central bank may use a tighter monetary policy

by increasing interest rates. Thus, people, instead of
spending their money immediately, prefer to save
more of it. In addition, increasing interest rates lead
to higher borrowing costs, which also discourages
spending in the economy.
DECLINE IN CONFIDENCE
Negative events in the economy, such as recession,

may also cause a fall in aggregate demand. For
example, during a recession, people can become
more pessimistic about the future of the economy.
Subsequently, they prefer to increase their savings
and reduce current spending.
DECLINE IN CONFIDENCE
Negative events in the economy, such as recession,

may also cause a fall in aggregate demand. For
example, during a recession, people can become
more pessimistic about the future of the economy.
Subsequently, they prefer to increase their savings
and reduce current spending.
GROWTH IN SUPPLY
An increase in aggregate supply is another trigger

for deflation. Subsequently, producers will face
fiercer competition and be forced to lower prices.
The growth in aggregate supply can be caused by
the following factors:
1. Lower production costs

2. Technological advances
LOWER PRODUCTION COSTS
A decline in price for key production inputs (e.g.,

oil) will lower production costs. Producers will be
able to increase production output, which will lead
to an oversupply in the economy. If demand
remains unchanged, producers will need to lower
their prices on goods to keep people buying them.
TECHNOLOGICAL ADVANCES
Advances in technology or rapid application of new

technologies in production can cause an increase in
aggregate supply. Technological advances will
allow producers to lower costs. Thus, the prices of
products will likely go down.
EFFECTS OF DEFLATION
Frequently, deflation occurs during recessions. It is

considered an adverse economic event and can
cause many negative effects on the economy,
including:
1. Increase in unemployment
2. Increase in real value of debt
3. Deflation spiral
INCREASE IN
UNEMPLOYMENT
During deflation, the unemployment rate will rise.

Since price levels are decreasing, producers tend to
cut their costs by laying off their employees.
INCREASE IN
REAL VALUE OF DEBT
Deflation is associated with an increase in interest

rates, which will cause an increase in the real value
of debt. As a result, consumers are likely to defer
their spending.
DEFLATION SPIRAL
This is a situation where decreasing price levels

trigger a chain reaction that leads to lower
production, lower wages, decreased demand, and
even lower price levels.
During a recession, the deflation spiral is a

significant economic challenge because it further
worsens the economic situation.
Frequently, deflation occurs during recessions. It is

considered an adverse economic event and can
cause many negative effects on the economy,
including:
Deflation reduces production of goods and services

due to reduction in demand for goods and services
from the consumers.
Reduction in production of goods and services leads

to reduced investments, reduction in the salaries of
employees, and also increase unemployment.
REASONS FOR DEFLATION
Technology such as computers keeps workers'

productivity high. Most information can be
retrieved in seconds from the internet. Workers
don't have to spend time tracking it down. The
switch from snail mail to email streamlined
business communications.
The excess of aging baby boomers allows

corporations to keep wages low. Many boomers
have remained in the workforce because they can't
afford to retire. They are willing to accept lower
wages to supplement their incomes. These lower
costs mean companies haven't needed to raise
prices.
Exports from China have kept prices low. The

country has a lower standard of living, so it can pay
its workers less. China also keeps its exchange rate
pegged to the dollar, which keeps its exports
competitive.

Inflation

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INFLATION

“Inflation means that your money won’t buy as

Inflation leads to a decline in the value of money. It

The inflation rate is the annual percentage change in

Inflation is measured by government statistics such

Inflation is seen to have economic costs.

1. Decline in value of savings

Demand-pull conditions occur when demand

It is when consumer demand for goods and services

If sellers don't raise the price, they will sell

They soon realize they now have the luxury

As people get better jobs and become more

As prices rise, people start to expect inflation.

That's when the government either spends

Putting extra money in people's pockets

Creates demand-pull inflation for specific

For example, Apple uses branding to create

The money supply is not just cash, but also

When the money supply expands, it lowers

The government can create inflation simply

It only occurs when there is a supply shortage

1. Fall in real wages

Deflation occurs when asset and consumer prices

It's an economics term that means you have to

In economics, deflation is a decrease in the general

Inflation reduces the value of currency over time,

Deflation is negative inflation. When it occurs, the

Recession is a business cycle contraction that

The fall in aggregate demand triggers a decline in

1. Fall in the money supply

A central bank may use a tighter monetary policy

Negative events in the economy, such as recession,

Negative events in the economy, such as recession,

An increase in aggregate supply is another trigger

1. Lower production costs

A decline in price for key production inputs (e.g.,

Advances in technology or rapid application of new

Frequently, deflation occurs during recessions. It is

During deflation, the unemployment rate will rise.

Deflation is associated with an increase in interest

This is a situation where decreasing price levels

During a recession, the deflation spiral is a

Frequently, deflation occurs during recessions. It is

Deflation reduces production of goods and services

Reduction in production of goods and services leads

Technology such as computers keeps workers'

The excess of aging baby boomers allows

Exports from China have kept prices low. The

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