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:For alternative meanings see inflation (disambiguation).In economics, inflation is a fall in the market value or purchasing power of money. This is equivalent to a rise in the general level of prices. Inflation is the opposite of deflation. Zero or very low positive inflation is called price stability.
In some contexts the word "inflation" is used to mean an increase in the money supply, which is sometimes seen as the cause of price increases. Some economists (of the Austrian school) still prefer this meaning of the term, rather than to mean the price increases themselves. Thus, for example, some observers of the 1920s in the United States refer to "inflation" even though prices were not increasing at the time. Below, the word "inflation" will be used to refer to a general increase in prices unless otherwise specified.
Inflation can be contrasted with "reflation," which is either a rise of prices from a deflated state, or alternately a reduction in the rate of deflation, that is, the general level of prices are falling at a decreasing rate. A related term is "disinflation", which is a reduction in the rate of inflation but not enough to cause deflation.
1 Measuring inflation
Inflation is measured by observing the change in the price of a large number of goods and services in an economy (usually based on data collected by government agencies, though labor unions and business magazines have also done this job). The prices of goods and services are combined to give a price index measuring an average price level, the average price of a set of products. The inflation rate is the percentage rate of increase in this index; while the price level might be seen as measuring the size of a balloon, inflation refers to the increase in its size.
There is no single true measure of inflation, because the value of inflation will depend on the weight given to each good in the index. Examples of common measures of inflation include:
- consumer price indexes (CPIs) which measure the price of a selection of goods purchased by a "typical consumer". In many industrial nations, annualised percentage changes in these indexes are the most commonly reported inflation figure. These measures are often used in wage and salary negotiations, since employees wish to have (nominal) pay raises that equal or exceed the rate of increase of the CPI. Sometimes, labor contracts include cost of living escalators (or adjustments) that imply nominal pay raises automatically occur due to CPI increases, usually at a slower rate than actual inflation (and after inflation has occurred). In 1995, the Boskin Commission found the CPI produced by the US Department of Labor's Bureau of Labor Statistics (BLS) to be a biased measure, and gave a quantitative analysis of the bias. The Boskin critique helped to spur some changes in the US CPI although it was partially disputed by the BLS. Many of the changes were aimed at moving the CPI to a cost of living model which takes consumer substitutions into account and typically reduces the reported level of inflation.
- producer price indexes (PPIs) which measure the price received by a producer. This differs from the CPI in that price subsidation, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any resulting increase in the CPI. Many believe that this allows a rough-and-ready prediction of CPI inflation tomorrow based on PPI inflation today, although the composition of the indexes varies; one important difference is the treatment and inclusion of services.
- wholesale price indexes which measure the change in price of a selection of goods at wholesale (i.e., typically prior to sales taxes). These are very similar to the PPI.
- commodity price indexes which measure the change in price of a selection of commodities. In the case of the gold standard the sole commodity used was gold. While under the USA bimetallic standard the index included both gold and silver.
- GDP deflator which is based on calculations of the gross domestic product: it is based on the ratio of the total amount of money spent on GDP (nominal GDP) to the inflation-corrected measure of GDP (constant-price or "real" GDP). (See real vs. nominal in economicsIn economics, the distinction between nominal and real numbers is often made. It corresponds to the distinction between money and inflation-corrected numbers. Nominal numbers such as nominal wages, interest rates and gross domestic product (GDP) refer to.) It is the broadest measure of the price level. Deflators are also calculated for components of GDP such as personal consumption expenditure. In the United States, the Federal ReserveThe Federal Reserve System (also known as the Federal Reserve or simply "The Fed") is the central bank of the United States. It was created by the United States Congress and enacted on December 23, 1913, when President Woodrow Wilson signed the Owen-Glass has shifted over to using the personal consumption deflator and other deflators for guiding its anti-inflation policies.
- Personal consumption expenditures price deflator (" PCE deflator ") (or the " implicit price deflator for personal consumption expenditures ", IPD for PCE). In its semi-annually " Monetary Policy Report to the Congress " (" Humphrey-Hawkins Report ") from February 17, 2000 the FOMC said it was changing its primary measure of inflation from the CPICPI may stand for: Consumer price index Congres paleoethnologique international Cour penale internationale Communist Party of India Center for Public Integrity Centre Permanent Informatique TLAs. to the " chain-type price index for personal consumption expenditures " ([1]). And what is primarily looked at is the less volatile "core" PCE deflator which can be found here: [2].
