How does inflation affect us? A great example from India
A hat tip to Sibylle Hyde from the Ellen Wilkinson School for Girls for spotting this super BBC news article on wage and inflationary pressures in India. Sibylle writes: “I found this BBC article on wage inflation in India, attached with suggested questions. I have used it for year 12 Economics & Business students (“how does inflation affect us all”) but then also gave it to year 13 Economics students for practice on international competitiveness.
The article and discussion questions are attached below.
How_does_inflation_affect_us.docx
Duck Tales and the Costs of Inflation!
A spring hat tip to Mark Seccombe for suggesting this resource as an alternative way of teaching some of the costs of rising inflation. Mark writes:
I was looking for an interesting way to teach the kids the problems of inflation rather than resorting to the slightly depressing Zimbabwe option which always ends up in a political discussion. I think I may have come up with something - DuckTales to the rescue!
The first episode of the pair is better and if you then run through into the first minute or two of the second one, it makes a nice 10 minutes starter!
Episode 1
Episode 2
If nothing else, it’s a great reminder of my youth!
How do you shop?
Lip gloss is the new lipstick according to the ever-changing basket of goods and services that make up the CPI basket, discussed here.
read more...»Slumpflation? UK inflation jumps to 3.5%
A bump in the night or a worrying sign that higher inflation will impose deal cuts on the real incomes of people taking pay freezes or the millions of savers being offered derisory interest rates on their deposit accounts? Consumer price inflation jumped to an annual rate of 3.5% last month prompting the Governor of the Bank of England to unlock the quill pen and write a letter of explanation to the government.
The reasons behind the latest surge in inflation look clear cut
1/ The lagged effects of the fall in sterling on import prices
2/ Much higher oil and gas prices and rising import prices for metals and other raw materials
3/ The effects of the reversal of the temporary cut in VAT (nb VAT is likely to rise to 20% by year end)
4/ Less discounting in the January 2010 sales compared to the same time last year when the UK retail sector looked close to melt-down!
And we can always blame the snow ........!!!!!
5/ Snow last month raised the price of certain seasonal vegetable prices, with cauliflowers rising by the highest amount since at least 1996 and the cost of carrots doubling
Snow as the cause of a spike in inflation .... do you get my drift?
Expect inflation to come down in the months ahead - the pricing power of retailers and manufacturers remains very weak and there is probably a substantial margin of spare capacity in the economy following the 5% decline in real output last year.
Britain is no longer a high inflation country despite the gloomy predictions of those concerned about the size of quantitative easing.
Economist: Storm before the calm
Stephanie Flanders considers the latest inflation figures (BBC news)
Inflationary pressures in China
This BBC news video provides an interesting window on the pressures for wages to rise in the booming city of Shanghai. The impressive rebound in Chinese economic growth is driven by the strength of the underlying growth forces in the economy together with the impact of the huge fiscal stimulus. But for many young professionals growth is causing the cost of living to surge - food and property prices are the main concerns. Inflation is a genuine risk for the Chinese economy - what might the Chinese authorities do about this?
read more...»Rethinking the mantra of price stability
In a break with the consensus that has enveloped policy makers in institutions such as the International Monetary Fund, the IMF’s Chief Economist Oliver Blanchard has written a new paper (Rethinking Macroeconomic Policy) that suggests that a relaxation of tough inflation targets and acceptance of slightly higher average inflation is needed to give macro economic policy more traction in the years ahead.
For A2 economists this is an important policy debate. Are the economic and social costs of average inflation of say 3 to 4% much higher than achieving consumer price inflation of 2%?
Here are some links to coverage of the paper.
Guardian: More inflation may be better after all, says IMF
Paul Krugman: The Case For Higher Inflation
Economist Blog: Reorienting macroeconomic policy
Mervyn King on Tailwinds and Headwinds
Mervyn King delivers the latest Inflation Report from the Bank of England and focuses on the strength of two forces:
1/ The tailwind of the policy stimulus from monetary and fiscal policy
2/ The headwind of the continued deleveraging in the financial system
It is a good analogy to use and one that students should be able to latch onto as they grapple with their macroeconomics.
This BBC news video provides a good overview of the Bank’s current thinking. In it the Governor explains why the Bank will - for the third time - expects to write to the Chancellor to explain an inflation overshoot. And he comes out with a good quote “Monetary policy can do little to affect short-term changes in inflation” ....... instead it has more leverage on the growth of total spending in the economy which (relative to the supply-side capacity of the economy) affects demand-pull inflationary pressures during the economic cycle.
And now here is the inflation weather forecast…
Weatherman John Kettley provides an inflation weather forecast at the start of this super four-minute audio clip on why economists, just like weather forecasters, get a lot of flack when they get things wrong.
Launch audio clip on inflation forecasting
China the hungry teenager
Hamish McRae is on excellent form in this piece in the Independent - China’s latest growth surge is the result of an enormous fiscal stimulus and a massive (and unsustainable) rise in credit.
One of the short term consequences is that China’s turbo-charged growth is once again putting upward pressure on world commodity prices. Just as a hungry teenager will happily eat food long into the night, China’s incremental demand for natural resources and manufactured components is threatening another rise in cost push inflationary pressures in the world economy. This is one of the inflation risks facing developed countries and a factor behind fears of a rise in short term and long term interest rates before a recovery gains sufficient traction.
Zimbabwe moves from hyperinflation to deflation
Ask a student on the first day back which countries you associate with hyper-inflation - its a fair bet that most will offer Zimbabwe as an answer - and of course they would have been right up to a few months ago. But currency reforms have brought about a remarkable twist in the inflationary outlook. “Since January, inflation has slowed rapidly after the country shelved use of the local currency and adopted various currencies such as the dollar, South African rand, British pound and Botswana pula” ......indeed there are signs of mild deflation in consumer prices.
Inflation targets
The UK first introduced inflation targets in 1992 following sterling’s suspension from the exchange rate mechanism. The government wanted an inflation target to be the ultimate objective of monetary policy having opted to move to a floating exchange rate system.
read more...»What is the True Cost of Christmas?
Hat tip to A Ellams for spotting this little gem!
What is the True Cost of Christmas?
The True Cost of Christmas is the cumulative cost of all the gifts when you count each repetition in the song—so it reflects the cost of 364 gifts.
There is a video link here on how the Christmas Price Index is constructed:
Deflation - Teacher Presentation
This new revision presentation examines the causes and effects of deflation and the possible economic policy responses.
Launch interactive presentation on deflation
Download pdf handout of presentation slides
Inflation - Measurement (Teacher Presentation)
This updated and extended revision presentation looks at the main measures of inflation - and some of the challenges and problems of measurement
Launch interactive presentation on Measuring of Inflation
Download printable pdf handout of presentation slides
Inflation - Causes and Effects (Teacher Presentation)
This updated revision presentation takes a detailed look at the causes and effects of inflation. It explains the theory behind demand pull and cost push inflation, and examines recent trends in data on average earnings, commodity prices and the output gap. There are also some new weblinks to great interactive resources on inflation.
Launch interactive presentation on Inflation: Causes & Effects
Download printable pdf handout of presentation slides
The power of words…
Some say that “words have meaning and names have power”. Well when Mervyn King speaks, markets listen. And sell the pound too.
read more...»Gloomy summary
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
The UK Economy - a Long Run Perspective
We tend to focus on short run changes in output, jobs, prices and profits and risk missing the long term picture of where an economy is. A year ago I produced this chartroom presentation as the UK economy entered recession - this has now been updated and might be useful for colleagues helping students develop an appreciation of the long-run trends in key UK economic data. It is available for download in pdf and scorn-compliant VLE format.
Launch streamed revision presentation on the Long Run Perspective
Download SCORM-compliant VLE ZIP version
Download printable pdf handout version
King confirms green shoots
CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news?
For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year.
But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.
read more...»Japanese unemployment rises to record high
Japan may have edged out of technical recession in recent weeks but deflationary pressures continue to bear down on their economy.
read more...»Inflation or Unemployment - Which is Worse
Here is a super short resource from BBC World Business. Paul Krugman, Nobel laureate and professor of economics in Princeton University, and first Niall Ferguson, history professor at Harvard University followed by interpretation of the discussion by Stephanie Flanders.
Deflation in the European Economy
Yesterday we learned that France and Germany were making tentative steps out of recession with 0.3% increases in real GDP in both countries during the second quarter (April through to June). Today the latest consumer price data came out for the Euro Zone and they show that the single currency area is now firmly in the grip of price deflation.
The average annual rate of inflation for the sixteen nations that are participating in the single currency was -0.7% in July 20092, down from -0.1% in June. A year earlier the rate was 4.0%.
For the EU as a whole there remains wide variations in the rate of inflation. Deflation is happening in Ireland (-2.6%), Belgium (-1.7%) and Luxembourg (-1.5%), whereas CPI inflation is relatively high in Romania (5.0%), Hungary (4.9%) and Poland (4.5%).
The latest CPI inflation data for the UK was 1.8% in June - a tad below the inflation target of 2.0%.
Inflation in the Euro Zone is likely to remain low in the near-term:
1/ There is a growing margin of spare capacity in the EU economy with most countries fighting recession and operating with a large negative output gap
2/ The recession is having a dampening effect on wage pressures
3/ A stronger Euro against the US dollar is keeping a lid on the cost of rising international commodity prices
4/ Manufacturers and retailers have lost pricing power because of the economic downturn
Borrow now inflation later - Art Laffer
Steve Evans interviews supply-side Economist Art Laffer - notorious for the Laffer Curve - who typically flags up some of the perceived dangers of government borrowing during a recession. This link takes you to the audio of the interview
Ireland in the grip of deflation
The debt ridden Irish economy is plunging into a period of price deflation according to new figures on consumer prices. The Irish economy is more exposed to the dangers of inflation than most because the private sector of the economy has a level of outstanding debt equivalent to around 175 per cent of GDP. The big risk is that a persistent downturn will bring about reductions in wages and prices and increase the real value of unpaid debts.
Q&A: Does a positive output gap always mean rising inflation?
A student asks “Does a positive output gap always mean rising inflation?”
read more...»Q&A: AD and Inflationary Pressures
A student asks: Will a rise in AD will only cause cost-push inflation if there is a positive output gap?
read more...»Revision - Stagflation
Stagflation refers to a combination of stagnant economic growth and high and rising inflation. Some economists also add in rising unemployment into the dangerous stagflation mix! In this situation it becomes difficult to manage the economy because, on the one hand, companies and employees are suffering from slow-growing or falling production (which can lead to weaker profits and job losses), whilst prices are rising more quickly which threatens our real standard of living.
read more...»Revision - Cost of Living
The cost of living is a measure of changes in the average cost for a household of buying a basket of different goods and services. Percentage changes in the cost of living are measured by the inflation rate and in the UK there are two officially published measures, the Retail Price Index (RPI) and the Consumer Price Index (CPI).
read more...»RIP RPI?
A headline in today’s Times
“Threat of deflation as retail price index falls to lowest-ever level”
I am confident that every AS and A2 economics student in the land will spot the obvious error in this headline! There is a world of difference between the general level of prices and the annual rate of change of prices!
Here Hugh Pym considers whether wage freezes or pay cuts will become a more frequent feature of the labour market during the recession.
Geographical Seepage in the World Economy
I was listening to a talk by Stephen King from HSBC a few weeks ago and he mentioned the idea of geographical seepage as it relates to the current state of the world economy.
read more...»
