Download Inflation

Inflation
General terms
 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
i  year t  
price level  year t   price level  year t 1
price level  year t 1
PRICE INDEXES
•
Consumer price index (CPI) - each item is assigned a fixed
weight proportional to its relative importance in consumer
expenditure budget
CPI 
Q
Q
0
P1
0
P0
100
•
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  can
be interpreted as a comprehensive price index
GDP deflator 
Q P
Q P
1
1
1
0
100
Numerical Example
 Calculate the consumer price index and the rate of inflation for 2006.
Base year (2000)
Weigh (%) Price
2006
Weigh(%) Price
Food
20
100
20
102
Shelter
50
100
50
106
Medical
care
30
100
30
110
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 0-10 % 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)
Inflation according to:
a) its impact on individual
commodity:
 Balanced – leaves relative
prices unchanged all prices
are rising at the same
percentage point each year it
doesn’t cause a change in
consumption structure
 Unbalanced – some prices are
increasing faster than the
general price level there 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.
IMPACT OF INFLATION
„cost of inflation“
1) Redistribution of income and wealth
2) Social impacts
3) Impact on balance of economy
SUMMARY OF IMPACTS
 there is no effect on real output, efficiency, or income
distribution of an inflation that is both balanced and
anticipated
 generally, 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
 the mildest impact will be found when inflation is at a
low rate – small, anticipated and balanced
 major social and economic impacts arise for galloping
inflation or hyperinflation
Causes of Inflations
1.DEMAND-PULL
INFLATION
- the essence of demandpull 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
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
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
wages and prices begin to accelerate the economy moves up
and to the left along the short run PC
 Period 3: Firms and workers begin to expect higher inflation  higher
expected rate of inflation gets incorporated into wage and price
decisionsthe short-run PC shifts upward
 Period 4: unemployment rate returns to the natural rate; contraction in
economic activity brings output back to its potential.
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 longrun PC is a vertical line rising straight up at the
NRU
Two important implications for
economic policy:
 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)
1. Calculate the CPI and IPD, if following amount of
products was consumed in economy:
Product
A
B
Price
16
820
C
3 600
1.Year
Quantity
120 000
31 000
290
Price
21
815
4 050
2. Year
Quantity
142 000
33 100
270