Inflation

Definition

Inflation is an economic phenomenon associated with monetary systems where the Price of goods and services in an economy increases. The Inflation Rate is the percentage change of an Inflation Index over time.

Measurement

In complex economies with multiple goods and services prices will not increase at the same rates. Various indexes such as the Consumer Price Index are aimed to capture the average level of inflation. Wage Inflation pertains specificaly to a rising cost of labor. The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer". Measurement (calculation) of inflation may vary by country. Measuring inflation requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance.

• The Consumer Price Index (CPI)
• The Personal consumption expenditures price index (PCEPI)
• The GDP deflator, is a measure of the price of all the goods and services included in gross domestic product (GDP)
• The Reuters-CRB Index (CCI)
• The Producer Price Index
• The Employment Cost Index (ECI)

Inflation may also be used (loosely) to describe rising price levels within a narrower set of assets, goods or services within an economy, such

• commodities
• real estate
• financial assets (such as stocks, bonds)
• wages

Core Inflation is a measure of inflation for a subset of consumer prices that excludes food and energy prices, which rise and fall more than other prices in the short term.

Causes

The causes of inflation have are debated among economists, with growth in the Money Supply being considered an important Factor (Monetarist view).

Inflation Expectations

Inflation expectation or expected inflation is the rate of inflation that is anticipated for some period of time in the foreseeable future.

Hyperinflation

Hyperinflation is a situation where inflation becomes so high that it interferes with the normal working of the economy leading to the effective abandonment of the currency

Deflation

Deflation is negative inflation, a situation where the nominal price of goods and services is decreasing.

Risk Management

Inflation can become a significant source of financial risk (Inflation Risk). There are a number of financial instruments that aim to support managing this risk:

• Inflation Derivatives
• Inflation Bond

Issues and Challenges

• Inflation measures are often modified over time (different baskets of goods or services)
• Inflation numbers are often seasonally adjusted

See also

• Hyperinflation
• Inflation Hedge
• Headline Inflation
• Core Inflation

References

• Inflation
• OECD Consumer Price Index
• United States Bureau of Labor Statistics – Consumer Price Index
• U.S. Inflation Calculator (1913–present) (US Bureau of Labor Statistics)
• U.S. Inflation (historical documents) (Federal Reserve Economic Data)
• World Bank annual inflation rates for all countries