Inflation & Consumer Price Index (CPI) | Economics for JAMB PDF Download

Introduction

• Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
• It is an important economic concept that has significant implications for individuals, businesses, and governments.
• In this set of notes, we will cover the types, measurements, effects, and methods of controlling inflation.

Types of Inflation

1. Demand-Pull Inflation:

• Occurs when aggregate demand exceeds the available supply of goods and services, leading to an increase in prices.
• Factors such as increased consumer spending, government expenditure, or investment can contribute to demand-pull inflation.

2. Cost-Push Inflation:

• Arises from an increase in production costs, such as wages, raw material prices, or taxes, which leads to higher prices.
• Cost-push inflation can be caused by factors like rising energy costs, higher wages due to labor union negotiations, or increased taxes on businesses.

Measurements of Inflation

1. Consumer Price Index (CPI):

• The CPI measures the average price level of a basket of goods and services commonly purchased by households.
• It is calculated by comparing the price of the basket in a given year to a base year and expressing it as an index number.
• The CPI is useful for assessing changes in purchasing power and inflation rates.

2. Inflation Rate:

• The inflation rate is the percentage change in the general price level over a specific period.
• It is calculated by comparing the CPI of two different time periods using the formula: ((CPI₂ - CPI₁) / CPI₁) × 100.

Effects of Inflation

1. Redistribution of Income and Wealth:

• Inflation can impact different groups of individuals and businesses differently, redistributing income and wealth.
• Creditors and savers may suffer as the real value of their money decreases, while debtors benefit by repaying debts with less valuable currency.
• Fixed-income earners, such as retirees, may face a decline in purchasing power.

2. Uncertainty and Economic Distortions:

• High and unpredictable inflation rates can create uncertainty, making it difficult for individuals and businesses to plan for the future.
• It can lead to distorted price signals, misallocation of resources, and reduced investment and economic growth.

Methods of Controlling Inflation

1. Monetary Policy:

• Central banks can use monetary policy tools to control inflation.
• They can increase interest rates to reduce aggregate demand, making borrowing more expensive and curbing spending.
• Conversely, central banks can decrease interest rates to stimulate economic activity during periods of low inflation or deflation.

2. Fiscal Policy:

• Governments can use fiscal policy to control inflation by adjusting taxation and government spending.
• Higher taxes can reduce disposable income and dampen demand, while increased government spending can stimulate economic activity.

3. Supply-Side Policies:

• Governments can implement supply-side policies to address cost-push inflation.
• These policies aim to improve the efficiency and productivity of the economy, reducing production costs and increasing the supply of goods and services.

Conclusion

• Inflation is a complex economic phenomenon with various types, measurements, effects, and control measures.
• Understanding the causes and consequences of inflation, as well as the tools available to manage it, is crucial for individuals, businesses, and policymakers.
• By examining inflation closely and implementing appropriate policies, economies can strive for stable and sustainable economic growth.