Inflation
Is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods.
Inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The standard measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The employment cost index is also used for wages in the United States.
Most economists agree that high inflation and hyperinflation levels— severely disruptive effects on the real economy—are caused by excessive money supply growth [Grilli, Vittorio, p.139]. Views on low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in actual demand for goods and services or changes in available supplies, such as during scarcities. Moderate inflation affects economies in both positive and negative ways. The adverse effects would include an increase in the opportunity cost of holding money, uncertainty over future inflation, which may discourage investment and savings, and, if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity,[13] allowing the central bank greater freedom in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.
Today, most economists favor a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy while avoiding the costs associated with high inflation. The task of keeping the inflation rate low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy by setting interest rates, carrying out open market operations, and (more rarely) changing commercial bank reserve requirements.
Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.
Inflation can be contrasted with deflation, which occurs when prices instead decline.
What Is Inflation? Investopedia. (2023). URL: https://www.investopedia.com/terms/i/inflation.asp
How does the government measure inflation? Brookings Institution. Retrieved from: https://www.brookings.edu/blog/up-front/2021/06/28/how-does-the-government-measure-inflation/
Grilli, Vittorio. (1994). European macroeconomics. Basingstoke, Hampshire: Macmillan.