Inflation and Relative Price Changes
Inflation and Relative Price Changes
Inflation and Relative Price Changes
changes.
Some further complications for
project appraisal.
Inflation
• Inflation is a general upward movement of some
measure of an ‘average’ price level.RPI CPI etc.
• The average price level is determined on the basis of
some agreed representative weighted ‘bundle of goods
and services’. Over time the ‘bundle’ itself will change
reflecting changes in patterns of consumption.
• Within that ‘bundle’ individual components will
experience different % price changes some rising faster
than others and some may be actually falling even in
nominal terms.
• It is measured as a % yearly increase and hence
described as an inflation rate.
• Each of us experiences a unique personal rate of
inflation due to individual patterns of consumption hence
a range of measures eg retail price index, wholesale
price index consumer price index etc.
• Inflation drives a wedge between nominal and real
values and there is frequently a need to ‘deflate’ nominal
values to eliminate the impact of price rises.
cont