Notes on Economics

Inflation

Principal causes of inflation and explanations

1) Cost-Push Inflation
Business costs rise and customers have to pay more for their products/services:
- raw materials more expensive
- countries doing well economically
- strong unions force bosses to pay workers more OR sparsity of skilled workers means
companies have to charge more to keep afloat
- land rents increase because fewer available
- business forced to charge more due to rising costs on their part

2) Demand inflation
More demand for products/services and supply unable to keep up. Governments can thus cause
inflation by, e.g., lowering taxes so that people have more disposable income (in the long term,
rises in price negate the initial boost.
- people earning more so can spend more
- fallen interest rates mean people are more likely to take out loans - companies respond to
this by raising their prices
- governments/banks might inject money into the economy, often resulting in more people having
more money to spend on the same stuff, inevitably leading to higher price (more demand =
higher inflation)

3) Government printing money

Printing more money in order to stimulate the economy, boost spending and creating more jobs.
Either more money is literally printed, government debt is increased or banks are allowed to make
bigger loans. Thus, there is more money in circulation and more is spent, however:
- money becomes less valuable since more money doesn't let you buy more, just the same stuff
at a higher price
- KEYNES argues that there is a window of opportunity before inflation occurs, however, where
people can spend, businesses and grow and more people can find jobs before prise increases
catch up - “a bit of inflation can grow the economy”.
- Governments can trigger inflation intentionally, but this is risky

Issues
- Nothing inflates at the same rate (incomes, goods and services, house prices)
- inflation is bad for savings as they don’t keep up with inflation (unless there is a good interest
rate…)
- Prices rise because we can’t control our very complex economy, and thus low inflation if very
difficult to achieve because so many things influence it: cost of materials, cost of labour,
productivity, tax, exchange rates, growing economy, neighbouring economies doing well, falling
interest rates, government bond sales, printing of money

Consumer Price Index (CPI)

- based on price of goods/services (education, clothes, transport, food etc.)
- creates average based on numbers to tell if cost of living is rising/falling
- hyper-inflation means value of money basically drops to nothing with inflation at hundreds of
percent
- prices increases in individual items are symptoms of inflation rather than inflation itself

In late 2000s, banks stopped lending to people which would be the only way for people to increase
their disposable income. Money was being pumped vastly into the economy but sitting in the banks
and not being seen by people - as it doesn’t filter through, prices don’t increase.
Purchasing power increases as the economy strengthens and banks are happier to release money
giving people more disposable income - this is met with inflation. Government

Interest Rates

Falling interest rates encourage people to spend more as they are not getting a decent return on
their dormant money. Thus more money goes into the economy and growth increases.
Rising interest rates encourage people to save as they get a better return on their money. Money is
sucked out of the economy and stays in bank accounts so growth slows.