After twelve months the price of good items in the basket may have risen by 25 per cent and that of housing by 20 per cent while the cost of transport is unchanged. Table 16.1 shows how the RPI for year two might then be calculated. Different families have different tastes hence different weightings. Not all regions in the country experience identical price changes. Effects of Inflation Advantages of Inflation Not everyone suffers from inflation.
Firms are able to increase prices and profits before they pay out higher wages.
Disadvantages of Inflation People on fixed incomes are unable to buy so many goods. UK goods may become more expensive than foreign-made products so the balance of payments suffers. Industrial disputes may occur if workers are unable to secure wage increases to restore their standard of living. The figure below shows increased demand and increased prices as consumers compete to buy up goods still available. A major source of inflationary pressure is the government which can print money to buy goods.