Economic problems of Inflation.

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Joe Levy

Economics Homework

RPI - The Retail Price Index is the main measure of inflation in the UK. It shows the amount prices have increased for spending on an average basket of goods. It is weighted to reflect the fact some price changes are more important than others. The weights are based on the Family Expenditure Survey which surveys a wide range of families to see how they spend their money. Like all index numbers it has a base year, and all changes are expressed as percentage changes around that base.

RPIX - RPIX is an adjusted measure of inflation. It is often alternatively known as the "underlying rate of inflation". It is the basic Retail Price Index adjusted for the effects of changes in interest rates. As interest rates are increased (to counter inflation), this will tend to lead to an increase in mortgage rates. Because mortgage costs are included in the RPI as a measure of the costs of housing, this will lead to an increase in the RPI. So increasing interest rates to reduce inflation leads to an increase in inflation! RPIX removes this effect to give a better picture of underlying inflation.

RPIY - RPIY is an adjusted measure of inflation. It is the basic Retail Price Index, adjusted for the effects of changes in interest rates and indirect taxes. Both of these changes can distort the Retail Price Index, and so RPIY can provide a useful measure.

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Labour Force Survey – This is a survey of 60,000 households in the U.K. It is based on those who are out of work who are seeking employment over the previous four weeks but who are able to start working in two weeks.

Claimant Count – This is calculated by all those who register as unemployed and claim job seekers benefit.

Deflationary Period – The features of this are that there are 6 months of no GDP growth, there is high unemployment, businesses shut, confidence is low, aggregate demand is low, there is deflation, and interest rates are low.


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