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# Inflation - PowerPoint PPT Presentation

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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Presentation Transcript

### 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

REVALFLATION = impact of inflation, where the result is an inner valorisation of exchange rate

Rate of inflation

General terms

• 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

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

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)

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:

IMPACT OF INFLATION „cost of inflation“

• Redistribution of income and wealth

• Social impacts

• Impact on balance of economy

• 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

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

• 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

„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.

• 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

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:

1. Calculate the CPI can sustain in the long run; and IPD, if following amount of products was consumed in economy: