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Tutor2u Economics: www .tutor2u.com
Inflation is a sustained increase in the general price level and a fall in the realpurchasing power of money. The rate of inflation is normally measured via aconsumer price index. For example the Retail Price Index in the UK measuresthe annualised rate of change in prices over the preceding twelve months.The rate of inflation can vary in intensity. With creeping inflation, the rate atwhich prices rise is modest (perhaps of the order of 1-4%). Accelerating inflationoccurs when the rate of inflation picks up above 5% - possible rising at rates inexcess of 10 per cent. Under the extreme conditions of hyper-inflation, moneyeffectively becomes worthless as a store of value, and it may lose the confidenceof all people in the economy as a medium of exchange for goods and services.The 1970s and 1980s were decades of high and volatile inflation in many coun-tries around the world. However in the 1990s there has been a clear decline inaverage inflation rates. The chart below shows annual consumer price inflationfor the Group of Seven nations (USA, Japan, Germany, Italy, France, Canadaand the United Kingdom). Average inflation has been below 4% for most of thedecade. By 1999 it is forecast to be less than 2%. Indeed in some countries, nota-bly Japan and China, there is whole economy price deflation—where the rate of inflation becomes negative. In Germany, the inflation rate is stable at approx0.5%.Low inflation is not the norm across all parts of the global economy. Average in-flation is the emerging economies in 1998 was 15.4% - largely because of thedangerously high inflation rates in countries of the former soviet union. How-ever—JP Morgan forecast that emerging economy inflation will drop to 7.9% in1999 and that globally (taking their survey of 49 countries) - the average annualincrease in prices will be only 2.6% (falling to 2.3% in 2000). It seems that thedanger of unstable global inflationary pressure is lifting from most of the worldeconomy—and the factors behind this need to be highlighted in the essay.
A-Level Essay Number 6
What factors explain lower inflation in the world economy?
1 November 1999
Key Revision Points
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Global inflation becamevolatile during the 1970s
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The 1990s has seen a re-turn to lower average infla-tion rates
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There are wide differencesin inflation rates betweencountries and regions ofthe world
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European inflation is verylow and prices are falling inJapan and China
A-LEVEL ESSAY PLAN
www.tutor2u.com Economics
In 1994, economistRoger Bootle publisheda book entitled “TheDeath of Inflation”. Heargues that globalinflationary pressuresare easing and thatbusinesses andconsumers must nowadjust to a world ofmuch lower averageinflation”
Key Concepts
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Consumer Price Index
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Creeping inflation
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Accelerating Inflation
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Price deflation
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Central Banks
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Inflation Targets
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Commodity prices
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Interest rates
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Inflation expectations
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Job insecurity
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Productivity growth
80828486889092949698G7: USA, Japan, Germany, Canada, France, Italy, UK
% change in consumer prices
02468101214
INFLATION IN THE G7 NATIONS
1998 1999Global 3.8 2.6OECD 1.1 1.4Japan 0.5 -0.8EuroArea0.8 1.5USA 1.5 2.6
INTERNATIONALINFLATION RATES (%)
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