CONTINUED FROM YESTARDAY............
DEFINITION OF INFLATION
Inflation is a rise in general
level of prices of goods and services over time. Although "inflation" is sometimes used to refer to a rise in the prices of a specific set of goods or services, a rise in prices of one set (such as food) without a rise in others (such as wages) is not included in the original meaning of the word. Inflation can be thought of as a decrease in the value of the unit of currency. It is measured as the percentage rate of change of a
price index[1] but it is not uniquely defined because there are various price indices that can be used.
Many economists believe that high rates of inflation are caused by high rates of growth of the
money supply.
[2] Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in
real demand for goods and services or in available supplies (i.e. changes in
scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the "
monetarists" argued that money supply dominated all other factors in determining inflation, while "
Keynesians" argued that real demand was often more important than changes in the money supply.
There are many measures of inflation. For example, different price indices can be used to measure changes in prices that affect different people. Two widely known indices for which inflation rates are reported in many countries are the
Consumer Price Index (CPI), which measures consumer prices, and the
GDP deflator, which measures price variations associated with domestic production of goods and services.
Measures of inflation
Inflation is measured by calculating the percentage rate of change of a price index, which is called the
inflation rate. This rate can be calculated for many different
price indices, including:
Consumer price indices (CPIs) which measure the price of a selection of goods purchased by a "typical consumer." In the
UK, an alternative index called the
Retail Price Index (RPI) uses a slightly different market basket.
Cost-of-living indices (COLI) are indices similar to the CPI which are often used to adjust fixed incomes and contractual incomes to maintain the
real value of those incomes.
Producer price indices (PPIs) which measure the prices received by producers. This differs from the CPI in that price subsidization, 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. Producer price inflation measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity. In
India and the
United States, an earlier version of the PPI was called the
Wholesale Price Index.
Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.
The
GDP Deflator is a measure of the price of all the goods and services included in
Gross Domestic Product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.
Capital goods price Index, although so far no attempt at building such an index has been made, several economists have recently pointed out the necessity of measuring
capital goods inflation (inflation in the price of stocks, real estate, and other assets) separately.[
citation needed] Indeed a given increase in the supply of money can lead to a rise in inflation (consumption goods inflation) and or to a rise in capital goods price inflation. The growth in money supply has remained fairly constant through since the 1970s however consumption goods price inflation has been reduced because most of the inflation has happened in the capital goods prices.
Other types of inflation measures include:
Regional Inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
Historical Inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. This is equivalent to not adjusting the composition of baskets over time.
TO BE CONTINUED TOMORROW......................
