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Chapter 9






                           Inflation




               4.1 Terminology

                    When describing cash flows it is important to clarify whether inflation is included
                     in the figures.

                     'Money’ cash flows          include predicted inflation and other price rises

                                                 they are the actual cash flows that take place


                                                 e.g. If I am awarded a 3% pay rise, then my gross
                                                  salary will increase by 3% in money terms


                     ‘Real’ cash flows           have had general inflation taken out of them

                                                 If general inflation is 3% per annum, then a 3%
                                                  pay rise leaves me no better off in real terms

                                                 If inflation is only 2% then I am approximately 1%
                                                  better off in real terms


               4.2  Switching between money and real rate indices

                    Real index = money index /inflation index


               4.3   UK Inflation

                    RPI and CPI – both based on baskets of goods

                    Fixed quantity price indices
























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