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Inflation

Inflation. DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of reducing a nation’s rate of inflation STAGFLATION = high inflation in periods of high unemployment

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Inflation

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  1. Inflation

  2. DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of reducing a nation’s rate of inflation STAGFLATION = high inflation in periods of high unemployment REVALFLATION = impact of inflation, where the result is an inner valorisation of exchange rate Rate of inflation General terms

  3. PRICE INDEXES • Consumer price index (CPI) - each item is assigned a fixed weight proportional to its relative importance in consumer expenditure budget • Producer price index (PPI) - measures the level of prices at the wholesale or producer stage • GDP deflator – the ratio of nominal GDP to real GDP è can beinterpreted as a comprehensive price index

  4. Numerical Example • Calculate the consumer price index and the rate of inflation for 2006.

  5. Categories of Inflation according to its pace/rate: • MODERATE INFLATION – occurs when prices are rising slowly (we might classify this as single-digit annual inflation rates è0-10 % per year) • GALLOPING INFLATION - occurs when prices start rising at double-or-triple digit rates (20, 100 % a year) • HYPERINFLATION –the extraordinary price increase (at annual rate of 100 % or more prevailing in a nation for at least one year)

  6. a) its impact on individual commodity: Balanced – leaves relative prices unchanged èall prices are rising at the same percentage point each year èit doesn’t cause a change in consumption structure Unbalanced – some prices are increasing faster than the general price level èthere can be seen an expressive impact on the demand and consumption structure b) predictability Anticipated Unanticipated Inertial inflation = tends to stay at its prior rate until shocked by economic events. Inflation according to:

  7. IMPACT OF INFLATION „cost of inflation“ • Redistribution of income and wealth • Social impacts • Impact on balance of economy

  8. SUMMARY OF IMPACTS • èthere is no effect on real output, efficiency, or income distribution of an inflation that is both balanced and anticipated • ègenerally, the economic impact of an unanticipated moderate inflation is mainly on the distribution of income and wealth, and less on the efficiency of the system • èthe mildest impact will be found when inflation is at a low rate – small, anticipated and balanced • èmajor social and economic impacts arise for galloping inflation or hyperinflation

  9. 1.DEMAND-PULL INFLATION - the essence of demand-pull inflation is too much spending beating against a limited supply 2. COST-PUSH INFLATION first appeared during the 1930’s and the 1940’s inflation caused by continual decrease in aggregate supply Causes of Inflations

  10. THE PHILLIPS CURVE • the Phillips curve depicts the relationship between unemployment and inflation, both in percent SHORT-RUN PHILLIPS CURVE • a nation could buy a lower level of unemployment if it were willing to pay the price of a higher rate of inflation

  11. The shifting Phillips curve „Boom cycle“ • Period 1: unemployment is at the natural rate; no demand or supply surprises; economy is on the lower short-run Phillips curve • Period 2: rapid increase in output during an economic expansion (f. e. as a result of expansion policy) lowers the unemployment rate èwages and prices begin to accelerate èthe economy moves up and to the left along the short run PC • Period 3: Firms and workers begin to expect higher inflation è higher expected rate of inflation gets incorporated into wage and price decisionsèthe short-run PC shifts upward • Period 4: unemployment rate returns to the natural rate; contraction in economic activity brings output back to its potential.

  12. The vertical Long-Run Phillips curve • When the unemployment rate diverges from the NRU the inflation tends to change • According to the natural rate theory, the only level of unemployment consistent with a stable inflation rate is the natural rate of unemployment the long-run PC is a vertical line rising straight up at the NRU

  13. 1) there is a minimum level of unemployment that an economy can sustain in the long run; 2) the nation can temporarily enjoy low rate of unemployment, but at the expense of rising inflation WAYS (COSTS) OF DISINFLATION: Temporary increase in unemployment above the NRU Income policies (wage- price control or voluntary guidelines) Two important implications for economic policy:

  14. 1. Calculate the CPI and IPD, if following amount of products was consumed in economy:

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