{
  "title": "Inflation: Prices on the Rise",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/inflation",
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  "summary": "Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year",
  "sections": [
    {
      "heading": "What is inflation and how it is measured",
      "content": "- Inflation is the rate of increase in prices over a given period of time; most commonly measured over a year.\n- Consumer price inflation: the percentage change in the consumer price index (CPI) over a certain period.\n  - Example method: \"if the base year CPI is 100 and the current CPI is 110, inflation is 10 percent over the period.\"\n- Core consumer inflation: excludes prices set by the government and the more volatile prices of products such as food and energy.\n- GDP deflator: an index with broader coverage than the CPI that shows how prices change over time for everything produced in an economy; includes nonconsumer items (such as military spending) and therefore is not a good measure of cost of living.\n- CPI basket: mostly kept constant for consistency but occasionally tweaked to reflect changing consumption patterns (for example, to include new hi-tech goods and to replace items no longer widely purchased)."
    },
    {
      "heading": "Distributional effects and the \"good and the bad\"",
      "content": "- Purchasing power and real income:\n  - If nominal incomes do not increase as much as prices, purchasing power and real (inflation-adjusted) income fall.\n  - Real income is a proxy for the standard of living.\n- Price adjustment heterogeneity:\n  - Some prices (traded commodities) change every day; others (wages established by contracts) are \"sticky.\"\n  - Uneven price changes reduce purchasing power for some consumers; this erosion of real income is described as the single biggest cost of inflation.\n- Effects on fixed-rate contracts:\n  - Example: a pensioner receiving a fixed 5 percent yearly increase to their pension loses purchasing power if inflation is higher than 5 percent.\n  - Example: a borrower with a fixed-rate mortgage of 5 percent benefits from 5 percent inflation because the real interest rate would be zero.\n  - Lenders’ real income suffers when inflation is not factored into nominal interest rates.\n- High inflation and hyperinflation:\n  - Some countries have experienced hyperinflation, defined here as 1,000 percent or more a year.\n  - Example: in 2008, Zimbabwe experienced estimated annual inflation at one point of 500 billion percent.\n  - Extreme inflation has led countries to take painful measures, sometimes including giving up their national currency.\n- Deflation risks:\n  - Falling prices can lead consumers to delay purchases, reducing economic activity and growth.\n  - Japan cited as an example of long period of nearly no economic growth largely because of deflation.\n  - Preventing deflation during the global financial crisis that began in 2007 was a motivation for prolonged low interest rates and other monetary policies by the US Federal Reserve and other central banks."
    },
    {
      "heading": "Causes of inflation",
      "content": "- Monetary causes:\n  - Long-lasting high inflation often results from lax monetary policy: if the money supply grows too big relative to the size of an economy, the currency’s purchasing power falls (quantity theory of money).\n- Supply-side pressures:\n  - Supply shocks that disrupt production (natural disasters) or raise production costs (high oil prices) can produce \"cost-push\" inflation.\n  - Example: the food and fuel inflation of 2008 transmitted across countries by trade.\n- Demand-side pressures:\n  - Demand shocks (a stock market rally) or expansionary policies (central bank lowers interest rates or government raises spending) can boost demand; if demand exceeds production capacity, \"demand-pull\" inflation can result.\n- Expectations and inertia:\n  - If people or firms anticipate higher prices, they build expectations into wages and contractual price adjustments, making expectations partly self-fulfilling and contributing to inflation inertia."
    },
    {
      "heading": "How policymakers deal with inflation",
      "content": "- Policy choice depends on inflation’s cause:\n  - If the economy is overheated, contractionary monetary policy—usually by raising interest rates—can rein in aggregate demand.\n  - Some central banks impose monetary discipline by fixing the exchange rate, tying their currency value and monetary policy to another country; effectiveness is limited when inflation is driven by global developments.\n  - Administrative price-setting (used by some governments in 2008) can prevent pass-through of high global prices but typically leads to large subsidy bills to compensate producers.\n- Managing expectations:\n  - Central banks increasingly rely on influencing inflation expectations as a disinflation tool.\n  - Policymakers announce intentions to keep economic activity low temporarily to bring down inflation, aiming to shape wage and price-setting behavior.\n  - The credibility of the central bank enhances the influence of such announcements on expectations.\n\nInflation: Prices on the Rise — Ceyda Oner, F&D Magazine\n\n---\n\n Content in this bundle\n\n- Inflation: Prices on the Rise - Back to Basics: Economics Concepts Explained - FINANCE & DEVELOPMENT\n  - Inflation: Prices on the Rise - Back to Basics: Economics Concepts Explained - FINANCE & DEVELOPMENT (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Inflation: Prices on the Rise - Back to Basics: Economics Concepts Explained - FINANCE & DEVELOPMENT (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/inflation"
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    "Authors: Ceyda Oner",
    "Published: July 30, 2019",
    "Inflation is the rate of increase in prices over a given period of time; most commonly measured over a year.",
    "Consumer price inflation: the percentage change in the consumer price index (CPI) over a certain period.",
    "Core consumer inflation: excludes prices set by the government and the more volatile prices of products such as food and energy.",
    "GDP deflator: an index with broader coverage than the CPI that shows how prices change over time for everything produced in an economy; includes nonconsumer items (such as military spending) and therefore is not a good measure of cost of living.",
    "CPI basket: mostly kept constant for consistency but occasionally tweaked to reflect changing consumption patterns (for example, to include new hi-tech goods and to replace items no longer widely purchased).",
    "Purchasing power and real income:",
    "Price adjustment heterogeneity:",
    "Effects on fixed-rate contracts:",
    "High inflation and hyperinflation:",
    "Deflation risks:",
    "Monetary causes:",
    "Supply-side pressures:",
    "Demand-side pressures:",
    "Expectations and inertia:",
    "Policy choice depends on inflation’s cause:",
    "Managing expectations:",
    "**Inflation: Prices on the Rise - Back to Basics: Economics Concepts Explained - FINANCE & DEVELOPMENT**"
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