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10 Minutes- Into your notes copy
- Title: Last year recall (Inflation, Chapter 26)
• What is the definition for inflation? (Page 204)
• What is deflation?
• What is aggregate demand?
• How is inflation measured?
Learn Like a GEM
Inflation
Learning Outcomes To Know
- Understand how to define inflation - I can give a definition for inflation
and deflation - I can explain how inflation is measured
- Understand how inflation is - I can explain how the Consumer Price
measured Index is measured.
- Understand the different types of - I can understand the different types of
inflation inflation
- Understand the effects of inflation - I understand the relationship between
on Economies. inflation and interest rates.
Macroeconomics Recap
What is Inflation?
• Definition: “A sustained rise in the general
price level in an economy over time.”
Deflation: “A sustained fall in the general
price level in an economy over time”
• Quick Check: “If bread was £1 last year and
£1.10 this year, what is the inflation rate?”
Macroeconomics Recap
How is inflation calculated?
Inflation is measured using the
Consumer Price Index (CPI)
• A measure of inflation that
tracks the average change over
time in the prices of a "basket"
of goods and services that
households commonly
purchase.
Some limitations for CPI
• Not everyone buys the exact same goods in an Economy (Some people don’t
drink alcohol, eat certain items etc).
• Substitution bias (People changing the items they buy because they are cheaper
at the time)
• Data errors (It is very hard to accurately capture this data)
Macroeconomics Recap
Formula for Inflation
• Quick Check: “If bread was
£1 last year and £1.25 this
year, what is the inflation
rate?”
• Answer?
Learning Outcomes To Know
I can
• Explain what Aggregate demand is
Explain aggregate demand and aggregate
• Explain what Aggregate supply is. supply
• I understand what cost-push and Ilustrate what cost-push and demand-pull
demand-pull inflation is is and give examples
I understand the effect of inflation on real
world scenarios.
Types of Inflation
There are 2 main types of Inflation
Demand-Pull Inflation: Occurs when aggregate demand (or AD) rises faster
than aggregate supply (AS).
Cause: “Too much money chasing too few goods.”
Examples:
⁃ Consumer spending boom (e.g., after tax cuts).
⁃ Government stimulus spending.
⁃ Export demand rises sharply.
Diagram Idea: Shift in AD curve to the right → higher price level
Graphic visual of
Demand-Pull
Inflation
Types of Inflation
Cost-Push Inflation
Definition: Occurs when production costs rise and firms pass them onto
consumers in higher prices.
Causes:
⁃ Wage rises (higher labour costs).
⁃ Raw material price increases (e.g., oil, energy).
⁃ Import costs rising (e.g., weak pound → imports more expensive).
Examples:
⁃ COVID-19 pandemic supply chain disruptions → shipping costs and raw
materials increased.
Graphic Visual of
Cost-Push Inflation
Cost Push or Demand Pull?
• Government cuts income tax → people have more disposable income and spend more.
• Demand pull
• A drought destroys wheat harvests → bread prices rise.
• Cost push
• UK exports become very popular overseas → foreign demand increases.
• Demand pull
• Oil prices double worldwide → transportation and production costs rise.
• Cost-push
• Wages increase in the construction industry → housing prices rise.
• Cost-push
Relationship between Interest Rates and Inflation
1. The Central Bank set the interest rate for their country or region (Central Bank of
the UAE (CBUAE), European Central Bank (ECB))
2. When Inflation is High- Central bank may raise interest rates.
Borrowing becomes more expensive → consumers and firms borrow/spend [Link] becomes
more attractive → reduces demand. This reduces demand-pull inflation.
3. When Inflation is Low (or economy is slow)- Central bank may lower interest rates.
Borrowing becomes cheaper → households buy more, firms invest [Link] becomes less
attractive → encourages [Link] stimulates demand, helping to avoid deflation.
Relationship between Interest Rates and Inflation
1. The Central Bank set the interest rate for their country or region (Central
Bank of the UAE (CBUAE), European Central Bank (ECB))
2. When Inflation is High- Central bank may raise interest rates.
Borrowing becomes more expensive → consumers and firms borrow/spend less.
Saving becomes more attractive → reduces demand.
This reduces demand-pull inflation.
Relationship between Interest Rates and Inflation
When Inflation is Low (or economy is slow)- Central bank may lower interest
rates.
Borrowing becomes cheaper → households buy more, firms invest more.
Saving becomes less attractive → encourages spending.
This stimulates demand, helping to avoid deflation.
Impacts of Inflation (Prices, Wages and Exports)
• Prices: General price level rises → cost of living increases.
• Wages: If wages don’t rise with inflation, real income falls (workers worse off).
• Exports: Goods become more expensive abroad → less competitive → possible
fall in demand for exports.
• Think-Pair-Share: “How might inflation affect a family’s weekly food shop?”
Impacts of Inflation (Unemployment, Menu Costs, Shoe Leather Costs)
• Unemployment: Cost-push inflation can reduce output and jobs.
• Menu Costs: Firms face costs of updating prices (e.g., menus,
catalogues, websites).
• Shoe Leather Costs: People spend more time/effort moving money to
protect value (e.g., shopping around for best interest rates).
Quick Question: “Can you think of a modern example of menu costs for
online businesses?”
(Impacts of Inflation) Uncertainty, Confidence & Investment
• Uncertainty: Firms unsure about future costs → harder to plan.
• Business Confidence: High inflation discourages long-term investment.
• Consumer Confidence: If people expect prices to keep rising, they may buy
now (fueling more inflation) or cut back (if wages don’t keep up).
• Investment: Lower if inflation is unstable → slower economic growth in future.
Effects of inflation
Real World Examples
(Research activity)
Cost-push inflation- to research (Research the ‘UK 1970s oil crisis’)
• Oil prices quadrupled (1973 OPEC Embargo)
• Higher transport/energy costs -> Widespread inflation
• Inflation peaked at over 20% in 1975
• Example of Cost-push inflation
Effects of inflation
Real World Examples
UAE Inflation Trends
• Inflation often linked to global oil prices and housing costs.
• 2008 Financial Crisis: inflation slowed as demand collapsed.
• Recent years (2021-22): Inflation rose due to higher global energy and food
prices.
• Example of imported inflation in open Economies
Effects of inflation
Real World Examples
Global COVID-19 Recovery (2021-22)
Demand-Pull: Governments gave stimulus -> spending surged as economies
reopened.
Cost-push: Supply chain disruptions (shipping, microchips, raw materials) pushed
costs up.
Inflation reached record highs in the US, UK, Eurozone.
- Mixed inflation pressures.