Transcript Inflation

Inflation






Inflation Rate
Price Indexes
Demand-Pull Inflation
Cost-Push Inflation
Upward Spiral of Prices and Wages
Impacts of Inflation
Inflation


Inflation denotes a rise in the general level
of prices.
The overall price level is measured by price
indexes.
Deflation and Disinflation


Deflation occurs when the general
level of prices is falling. Deflation
have been rare in the late twentieth
century.
Disinflation denotes a decline in the
rate of inflation.
Price Index

A price index is a weighted average of the
prices of a number of goods and services.
Each price is weighted according to the
economic importance of the commodity in
question.
Price Index



CPI –Consumer Price Index measures the
cost of a market basket of consumer goods
and services, including prices of separate
classes of commodities.
PPI – Producer Price Index measures the
level of prices at the wholesale or producer
stage.
GDP Deflator (IPD implicit price
deflator) is the ratio of nominal GDP to
real GDP and can thus be interpreted as the
price index of all components of GDP.
Price Index



CLI –Cost of Living Index measures the cost of
a market basket maintaining a certain standard of
living.
The Price Index of Agricultural producers is
calculated from prices collected among selected
producers in agriculture (private, cooperative and
state-owned companies) and does not include
VAT.
Import and Export Price Indexes measure
average changes in prices of goods and services
that are imported or exported.
Inflation Rate

Inflation rate (π) is the rate of change of
general price level measured e.g. by CPI:
CPIt  CPIt 1
t 
100   
CPIt 1
t = given year
Three Categories of Inflation



Moderate Inflation is characterized by
slowly rising prices (single-digit annual
inflation rate).
Galloping Inflation: inflation in the
double- or triple-digit range.
Hyperinflation occurs when prices rise at
a thousands, million or trillion percent
annually.
Inflation

From the visibility point of view:



Open Inflation
Hidden Inflation
Stifled Inflation
Inertial Inflation


Inertial Inflation is the rate of inflation that
is expected and built into contracts and
informal arrangements.
This built-in inertial inflation rate tends to
persist until a shock causes it to move up or
down.
Demand –Pull Inflation


Demand-pull inflation occurs when AD
rises more rapidly than the economy’s
productive potential.
Demand-pull inflation can arise from:


High supply of money
Excessive fiscal deficits
Demand –Pull Inflation
AS
With a steep AS curve,
much of the higher
aggregate spending ends
up in higher prices.
P
E1
P1
E
AD1
P
AD
QP Q1
Q
Cost –Push Inflation


Cost-push inflation is resulting from rising
costs during periods of high unemployment.
Cost-push inflation is a new phenomenon of
modern industrial economies.
Cost –Push Inflation
AS1
Cost-push pressures
dominate when labour
unions exercise market
power by rising wages,
or when external factors
drive up prices of raw
materials unexpectedly.
AS
P
P1
E1
E
P
AD
Q1 QP
Q
Upward Spiral of Prices and
Wages

An upward spiral of prices and wages
occurs when aggregate supply and demand
shift up together. When prices and wages
are rising and are expected to continue
doing so, businesses and workers tend to
build the rate of inflation into their price
and wage decisions.
Upward Spiral of Prices and
Wages
AS
2
AS1
AS
P
E2
Inertial inflation occurs
when the AS and AD
curves are moving
steadily upward at
the same rate.
E1
AD2
E
AD1
AD
QP
Q
Slumpflation
AS1
AS
P
P2
As long as inertial elements
driving up costs are
powerful, a recession may
occur simultaneously
with high inflation.
E1
P1
E
P
AD
Q1 QP
Q
Effects of Inflation

Microeconomic effects of inflation on
income and wealth distribution



Consumers and investors change their habits
(redistribution of expenditures)
Income redistribution - people with fixed
income are less able to cope with inflation
Wealth redistribution – in general, those who
have borrowed money are better off and it
hurts those who have lent money.
Effects of Inflation

Macroeconomic effects of inflation



Consumption structure changes, investment decisions
became more complicated → total output falls
Substitution of labour for capital (if wages are
growing faster than productivity) → structural
unemployment increases
Exchange rate fluctuation , export is more expensive,
domestic currency depreciates → prices of imported
goods are growing . Final effect of depreciations
depends on price elasticity of imported and exported
goods.


Effects on output and economic
efficiency - inflation may be associated
with either a higher or lower level of
output and employment;
There is no effect on real output,
efficiency, or income distribution of an
inflation that is both balanced and
anticipated.
Anti-Inlationary Policy


Fiscal policy, monetary policy and supplyside policy.
Government and Central bank antiinflationary measures:



Decrease of budget deficit
Loan restriction
Price and wage freeze