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real value
of your debt would have been halved. In general, in times of 
inflation those with economic power tend to gain at the expense of the weak, particularly those on fixed 
incomes. 
5.2.2 Balance of payments effects 
If a country has a higher rate of inflation than its major trading partners, its exports will become 
relatively expensive and imports relatively cheap. As a result, the balance of trade will suffer, affecting 
employment in exporting industries and in industries producing import-substitutes. Eventually, the 
exchange rate will be affected. 
5.2.3 Uncertainty of the value of money and prices 
If the rate of inflation is imperfectly anticipated, no one has certain knowledge of the true rate of 
inflation. As a result, no one has certain knowledge of the value of money or of the real meaning of 
prices. If the rate of inflation becomes excessive, and there is 'hyperinflation', this problem becomes so 
exaggerated that money becomes worthless, so that people are unwilling to use it and are forced to 
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CHAPTER 3
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THE MACROECONOMIC ENVIRONMENT 
 
65 
resort to barter. In less extreme circumstances, the results are less dramatic, but the same problem 
exists. As prices convey less information, the process of resource allocation is less efficient and rational 
decision-making is almost impossible. 
5.2.4 Resource costs of changing prices 
A fourth reason to aim for stable prices is the resource cost of frequently changing prices. In times of 
high inflation, substantial labour time is spent on planning and implementing price changes. Customers 
may also have to spend more time making price comparisons if they seek to buy from the lowest cost 
source. 
5.2.5 Economic growth and investment 
It is sometimes claimed that inflation is harmful to a country's economic growth and level of investment.. 
Although some studies have indicated that the adverse influence of inflation on economic growth and 
investment appears to be small in the short term, it could affect a country's standard of living fairly 
significantly over the long term. 
5.3 Consumer price indices 
We have already referred to the way in which inflation erodes the real value of money. In order to 
measure changes in the real value of money as a single figure, we need to group all goods and services 
into a single price index.
A consumer price index is based on a chosen 'basket' of items which consumers purchase. A weighting 
is decided for each item according to the average spending on the item by consumers. 
Consumer price indices may be used for several purposes, for example as an indicator of inflationary 
pressures in the economy, as a benchmark for wage negotiations and to determine annual increases in 
government benefits payments. Countries commonly have more than one consumer price index because 
one composite index may be considered too wide a grouping for different purposes. 
5.3.1 The RPI and the CPI 
One important measure of the general rate of inflation in the UK used over many years has been the