1. +
Inflation
Jodie O‟Connor and Melissa Byrne

2. +
Question 6
•
(i) With reference to research you have completed discuss 3
main causes of inflation.
•
Give 2 examples of economic history for each
1. Demand-Pull Inflation
2. Cost-Push Inflation
3. Increase in Money Supply
•
(ii) Outline 3 problems of high inflation

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Overview

What is inflation?

How is it caused?

Problems with high inflation

Conclusion

References

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What is inflation?

It is the level at which prices for goods and services rise, and
how buying power falls. It is best to have a steady growth of
inflation as too much of a rise or too much deflation can be
detrimental to the economy of that country. It is the central
banks job to keep prices changes to a minimum.
(Investopia, 2013)

Most central banks try to keep their inflation rates at 2-3%.

Irelands current inflation rate is 0.1% (Worldwide Inflation
Data, 2013)

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Ireland‟s inflation rate changes

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Inflation

For example in December 2012 a woman goes to do her
Christmas food shopping when she arrives at the till her total
was €200.

In December 2013 she bought the exact same things but it cost
her €210. This means that in a year the trolley of shopping
went up by 5% i.e. the inflation rate was 5%.

Here is a video that explains inflation in easy terms

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What causes Inflation?
There are 3 main causes of inflation
1.
Demand-Pull Inflation
2.
Cost-Push Inflation
3.
Increase in Money Supply
AD = C + I + G + (X-M) where C is consumer expenditure, I is
investment, G is government expenditure, X is exports and M is
imports

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Demand-Pull Inflation

This happens when Aggregate Demand (AD) grows at a rate
that is faster than Aggregate Supply (AS). (Bized)

Example : A company producing One Direction Clothing has a
capacity to produce that is growing at 2%. Once the demand
rate grows at the same rate or slower the company has no
problem. When the One Direction concert comes around the
demand soars up to 15%. We have “too much money, chasing
too little goods”.

The solution for the company is to put up the price so that not
everybody can afford it and demand will decrease.

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Demand-Pull Inflation
(Bized)

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Examples in History

In the US the increase in the value gold after the 2008 financial
crisis caused demand pull inflation, this continued until gold
reached an all-time high record of $1,895 per ounce on
September 5, 2011.

Another example is the property boom in Ireland during the
Celtic Tiger. House prices around the country soared to crazy
prices but especially in the South Dublin costing way more than
their value because everybody wanted houses in these „elite‟
areas. Most of these peoples houses are in negative equity at
the present time.

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Cost- Push Inflation

This happens when there is a rise in production costs. Such as
wages or raw material costs.

There are fewer goods being produced by the company as it is
more expensive to make the volume they were before the rise
in production costs, therefore demand exceeds supply.

This causes the finished products price to increase causing
inflation.
(Investopia, 2013)

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Examples in history

Natural disasters are a big cause of cost push inflation.

A tsunami and huge earthquake in 2011 in Japan caused this to
happen. An estimated 28,000 were dead or missing.

Following this disaster Toyota, Nissan, Honda, Mitsubishi and
Suzuki all had to suspend production which caused prices of
car parts for these cars to skyrocket all over the world.
(Amedo, 2012)

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Examples in history

The formation of OPEC in the 1970s created a monopoly for
this organisation. Before they formed together they didn‟t think
they were getting a fair price for their oil as it is a nonrenewable resource.

The members of OPEC now produce 46% of oil each year and
control 80% of the world‟s known oil reserves. As long as the
members stay to the price decisions of OPEC they can raise oil
prices this creates cost-push inflation.

OPEC is blamed for aiding a 16 month recession in the US with
the oil embargo. They quadrupled the price for a few months in
1973.
(Amedo, 2012)

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Increase in Money Supply

If a country prints too much money to get themselves out of
recession which sounds like the easy way, the value of the
money decreases in the ratio to the amount of money that is
printed.

The more money you print the more inflation rises.

If too much money is printed it becomes worthless to the point
where objects are exchanged for goods instead of money.
(S-cool, 2013)

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Examples in history

On 2nd December 2008 it was reported that in Zimbabwe the
annual inflation rate was 516 Quintillion percent.

Mugabe thought to take the country out of recession he would
just print
more money.

Their money
became worthless

The people
started trading in
gold.

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Examples in History

In Hungary in 1946 hyperinflation occurred

Their inflation rate at its peak reached an outrageous of 13.6
quadrillion % per month. (13, 600, 000, 000, 000, 000%)

The largest denomination bill was a 100 Quintillion note. Prices
ended up doubling every 15 hours.

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Problems with high Inflation
1.
Money loses its value. The buying power of €100 in 2012 will not
get you the same amount of goods in 2013.
2.
There is an uncertainty of the value of money. It lessens the
value of money and makes it difficult to predict what prices or
wages will be in the future.
3.
Changing menus or catalogues for company's. Prices rise with
inflation so restaurants or places like Argos must get new menus
or catalogues to use with higher prices.
4.
As money loses its value, people start to use other things such a
gold to buy things as their money become worthless. In
Zimbabwe currently they have no currency because of the
hyperinflation in 2008-2009. They use other countries
currencies.

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Problems with high Inflation
5.
Imports become cheaper than home produced goods. Our
exports cant keep up with with the produce of other countries.
This causes the Balance of Payments to fall apart which lead
to exchange rates to fall.
6.
Income is spent on objects rather than saving for example in
the boom of the Celtic Tiger people were buying property for
4 times what it‟s worth and is now in negative equity.
7.
Extra resources are needed to accommodate the population
with more money than they had before.
(Boundless)

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Conclusion

Inflation is the rise in prices and fall in buying power

The ideal inflation rate in 2-3%

3 mains types of inflation

Demand-Pull Inflation

Cost-Push Inflation

Increase in money supply

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References

Amedo, K. (2012, 03 12). What is cost push inflation? Retrieved from US Economy:
http://useconomy.about.com/od/inflationfaq/f/Cost-Push-Inflation.htm

Bized. (n.d.). Monetary Policy Inflation. Retrieved from Bized:
http://www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories1.htm

Boundless. (n.d.). Measuring a nations output and income. Retrieved from Boundless.com:
https://www.boundless.com/economics/measuring-a-nation-s-output-and-income/comparing-current-and-historicalvalues-with-inflation/introduction-to-inflation-and-its-consequences/

Investopia. (2013). Cost-Push Inflation. Retrieved from Investopia:
http://www.investopedia.com/terms/c/costpushinflation.asp

Investopia. (2013). Inflation Definition . Retrieved from Investopia: http://www.investopedia.com/terms/i/inflation.asp

S-cool. (2013). A-level Economics Inflation and Monetary Policy. Retrieved from S-cool: http://www.s-cool.co.uk/alevel/economics/inflation-and-monetary-policy/revise-it/what-are-the-causes-of-inflation

Worldwide Inflation Data. (2013). Inflation Ireland - current irish infaltion rate. Retrieved from inflation.eu:
http://www.inflation.eu/inflation-rates/ireland/inflation-ireland.aspx