How much did Man Utd pay its players per week in 1960?

£50 a week

How much do you think each of these items cost in the 1960’s?

2.5p

5p

All will be able to define what the term inflation means and identify the current level of CPI in the UK MOST will be able to explain how CPI is calculated SOME will be able to discuss how a rise in CPI is likely to impact a business

Title and LO: What is CPI and how does it effect a business?

Learning Objectives

Working towards: P5 “describe the influence of two contrasting economic environments on business activities within a selectedOrganisation”

Inflation

• Inflation occurs when prices are rising. This means the cost of living is increasing.

• The Retail prices Index (RPI) - calculates the cost of a typical basket of goods. The difference in price for these goods, from one year to the next, gives the rate of inflation.

Defining Inflation

• Inflation is a sustained increase in the average price level of a country.

• The rate of inflation is measured by the annual percentage change in the level of prices as measured by the consumer price index.

• A sustained fall in the general price level is called deflation – in this situation, the rate of inflation becomes negative.

What does this tell us about inflation?

• For example, if the inflation rate is 2% annually, then theoretically a £1 pack of gum will cost £1.02 in a year.

• Is your pound coin worth the same as it was before?

• Hint: can you buy that pack of gum now?

Defining CPI

• CPI – Consumer Price Index• A measure of changes in the purchasing

power of a currency and the rate of inflation. The consumer price index expresses the current prices of a basket of goods and services in terms of the prices during the same period in a previous year, to show the effect of inflation on purchasing power.

What does this graph tell us?THINK PAIR SHARE

Research Task

• 1) What is the UK’s current level of CPI? Use www.statistics.gov.uk to find out.

• 2) Using www.rateinflation.com/consumer-price-index/ find out the CPI for the following countries;• USA• Australia• Canada• Japan

• 3) In general is CPI rising or is it falling?

Research Task

Country CPI (2010) CPI (2014)

United States 218.312

Japan 171.995

Australia 172.1

Canada 116.7

United Kingdom 114.9

Japanese consumer price index, 2000=100Price Deflation in Japan - Coming to an End?

Source: Reuters EcoWin

97 98 99 00 01 02 03 04 05 06

2000

=100

97.5

98.0

98.5

99.0

99.5

100.0

100.5

101.0

101.5

102.0

Consumer price index for Japan

Deflation: Japan

• Deflation is when the rate of inflation becomes NEGATIVE.

Inflation damages business because it creates uncertainty. A rise in the rate of inflation might reflect a rise in the costs they have to pay:

• Employees will want more wages• Cost of materials may go up• The cost of fuel and energy may also riseRising costs eat into profit. Businesses then have a

choice:• Keep prices constant and see profits fall• Raise prices and perhaps lose out to competitors

Impact of Inflation on Business

Review QuestionsWhat is inflation?

What is the CPI?

What is the current rate of inflation?

What is the Bank of England’s target rate?

What is hyperinflation?

What is the difference between GDP and CPI

Coursework – P5• Final writing frame on K-drive

• Use the hint sheet to make sure you have answered everything

• Section on interest rates has been added

• M2 is on K-Drive too

• Homework – complete P5/M2 by Thursday 20/11/14