Moderate Inflation

7 Key excerpts on "Moderate Inflation"

• 

  eBook - PDF

  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  First, the impact of inflation will differ considerably according to whether it is creeping up slowly at 0% to 2% per year, galloping along at 10% to 20% per year, or racing to the point of hyperinflation at, say, 40% per month. Hyperinflation can rip an economy and a society apart. An annual inflation rate of 2%, 3%, or 4%, however, is a long way from a national crisis. Low inflation is also better than deflation which occurs with severe recessions. Second, economists sometimes argue that Moderate Inflation may help the economy by making wages in labor markets more flexible. The discussion in Unemployment pointed out that wages tend to be sticky in their downward movements and that unemployment can result. A little inflation could nibble away at real wages, and thus help real wages to decline if necessary. In this way, even if a moderate or high rate of inflation may act as sand in the gears of the economy, perhaps a low rate of inflation serves as oil for the gears of the labor market. This argument is controversial. A full analysis would have to account for all the effects of inflation. It does, however, offer another reason to believe that, all things considered, very low rates of inflation may not be especially harmful. 22.5 Indexing and Its Limitations LEARNING OBJECTIVES By the end of this section, you will be able to: • Explain the relationship between indexing and inflation • Identify three ways the government can control inflation through macroeconomic policy When a price, wage, or interest rate is adjusted automatically with inflation, economists use the term indexed. An indexed payment increases according to the index number that measures inflation. Those in private markets and government programs observe a wide range of indexing arrangements.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Exchange Rate Alignments

  • J. Mills(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  40 Few topics are as loaded with ideological baggage as whether inflation, at least in moderation, is desirable or a scourge. It is also clear, at least in nearly all the Western world, which side has won this particular battle of ideas. It is now the conventional wisdom almost everywhere that one of the most significant objectives of economic policy – perhaps the most important of all – is to maintain the average increase in the price level at no more than or about 2 per cent. There is, however, remarkably little reason to believe that an infla- tion rate as low as this is a particularly worthwhile goal if the inter- ests of society as a whole are taken into account. In particular, there is very little evidence that it can be combined with other targets, such as full employment and a growth rate as high as, say, 4 or 5 per cent per annum. Of course, there are strong arguments against allowing very rapid increases in the price level to occur. Nobody wants hyperinfla- tion. Yet this is an entirely different matter from tolerating some extra inflation to secure much improved growth and job prospects, if such a trade-off exists. In fact, very low price-level increases are uncommon in competently run, fast-growing, full-employment economies. Almost all have annualized inflation rates bunched around 4 per cent 1 – as did nearly all of western Europe in the 1950s and 1960s 2 – for good reasons and with few ill effects. An important study carried out by the International Monetary Fund in 1995 showed that there was no system- atic evidence that inflation rates below about 8 per cent per annum caused enough disruption to slow growth or increase the number out of work. 3 The widely exhibited determination in the Western world to keep inflation down to very low levels is not, therefore, a sign of economic wisdom. It is much more convincingly seen as another sign of the 3 Inflation

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Inflation

  History and Measurement

  • Robert O'Neill, Jeff Ralph, Paul A. Smith(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  For many people, a definition of inflation as the increase in the price levels experienced in an economy may be enough for them to be happy that they understand it. However, for those of a statistical mindset, the 1 We note here that we are deliberately keeping away from the contentious phrase ‘maintaining a fixed standard of living’, which will be discussed more fully in later chapters. 2 See, for example, Mankiw and Taylor (2017), p. 583 or Sloman et al., p. 262. 2 What Is Inflation? 23 definition of inflation we have offered is likely to call to mind questions regarding what the price level experienced by people in an economy is and how we go about measuring it when we are in a situation in which we do not have complete information regarding prices and quantities involved in economic transactions. It is, however, worth noting that the rest of this book is focused on how changes in price levels are measured by statisticians and how they relate to the original concept of inflation which we often see defined at a fairly high level. If these questions did not come to mind when you read or heard the definition of inflation mentioned above then it is hoped that this book will help you see that they are important for understanding the phenomenon of inflation and its measurement. If you immediately questioned how the price level might be measured, we hope this book will provide at least a partial solution to the questions you are asking. Alongside the definition of inflation, we will also often hear econo- mists make use of the term deflation which the OED defines as a reduc- tion in the level of prices in an economy. 3 This refers to periods of time in which the level of prices, however measured, is declining, rather than increasing as is the more common situation in modern economies.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Principles of Macroeconomics

  • Steven A. Greenlaw, Timothy Taylor(Authors)
  • 2014(Publication Date)
  • Openstax

    (Publisher)

  Inflation, on the other hand, means that there is pressure for prices to rise in most markets in the economy. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped—well, then it would not be inflation any more. This chapter begins by showing how to combine prices of individual goods and services to create a measure of overall inflation. It discusses the historical and recent experience of inflation, both in the United States and in other countries around the world. Other chapters have sometimes included a note under an exhibit or a parenthetical reminder in the text saying that the numbers have been adjusted for inflation. In this chapter, it is time to show how to use inflation statistics to adjust other economic variables, so that you can tell how much of, say, the rise in GDP over different periods of time can be attributed to an actual increase in the production of goods and services and how much should be attributed to the fact that prices for most things have risen. Inflation has consequences for people and firms throughout the economy, in their roles as lenders and borrowers, wage-earners, taxpayers, and consumers. The chapter concludes with a discussion of some imperfections and biases in the inflation statistics, and a preview of policies for fighting inflation that will be discussed in other chapters. 9.1 | Tracking Inflation By the end of this section, you will be able to: • Calculate the annual rate of inflation • Explain and use index numbers and base years when simplifying the total quantity spent over a year for products • Calculate inflation rates using index numbers Dinner table conversations where you might have heard about inflation usually entail reminiscing about when “everything seemed to cost so much less.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  4 Inflation Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. Milton Friedman 1 WHAT IS INFLATION? Inflation tells us the changing (increasing) price of a range of goods or services; basically how much of something we can get for our money. The rate of change of prices – the speed at which the price of goods and services that are bought by households or businesses alter – is called inflation. But prices can also fall, in a process called deflation, sometimes termed negative inflation. Inflation is more common than deflation, or at least it has been in the last 50 years or so, and so it has become associated with changes in the price of goods and services. Historically, however, price falls were as common as price rises, as we will see later. Both inflation and deflation have advantages and disadvantages, which we will explore in more detail later in this chapter. THE HISTORY OF INFLATION Inflation has been around for a long time, but, as Figure 4.1 shows, the level of prices (the index) really only rose consistently and sharply in the UK from the 1970s onwards. This was after the US came off the gold standards and the Bretton Woods system of fixed exchange rates, which had prevailed after the Second World War, ended. Money was now backed by government fiat and trust rather than by gold. And exchange rates were no longer fixed but allowed to float freely. This seems to have led to a rapid rise in the level of prices or, in other words, to the Retail Prices Index. Before that, for hundreds of years, the level 1 Friedman, M., The Counter-Revolution in Monetary Theory (1970). 100 Trading Economics Retail Price Index (1987 = 100) 0 10 20 30 40 50 60 70 80 90 100 1264 1296 1328 1360 1392 1424 1456 1488 1520 1552 1584 1616 1648 1680 1712 1744 1776 1808 1840 1872 1904 1936 1968 2000 Figure 4.1 Price index over time.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Advances in Macroeconomic Theory

  International Economic Association

  • J. Drèze(Author)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Recent research has produced measures of the relative size of these costs and benefits in an economy that suggest that inflation targets between 0 and 2 per cent (bias-adjusted) are optimal. But there are two important caveats. First, to the extent that labour pro- ductivity is increasing on average, there is room to reduce the inflation target. Second, the optimal rate of inflation depends on the mixture of shocks and rigidities to which an economy is subject. Furthermore, a long- run steady rate of low inflation implies fewer nominal shocks and puts pressure on price and wage setters to reduce rigidities. Thus, the optimal rate of inflation may differ somewhat across countries and evolve over time. Notes 1. Examples include Bolivia, Israel and Argentina. 2. The literature on the connection between inflation and growth is large and growing, with less than robust results. Andrés and Hernando (1999) is a recent example. 3. Mishkin (1999) provides a discussion of the recent international experience of various monetary regimes. 4. In their Table 1, Morandé and Schmidt-Hebbel (1999) also identify 34 countries that target primarily money and 36 that target exchange rates. 5. The political economy of monetary policy and the importance of credibility have been widely studied. The research in this area has focused on the impor- tance of a structure in which the central bank is independent of the elected officials in the government. See, for example, Alesina and Summers (1993). With independence of operation comes the need for central banks to be accountable for their performance, usually relative to an inflation objective set by statute or agreement with other branches of government. Cecchetti and Groshen: Understanding Inflation 131 6. Throughout this section, we assume that the measurement of core inflation is a statistical problem associated with the estimation of long-run trend movements in prices.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Principles of Economics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  A relative price change occurs when you see that the price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means that there is pressure for prices to rise in most markets in the economy. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped, then it would not be inflation any more. This chapter begins by showing how to combine prices of individual goods and services to create a measure of overall inflation. It discusses the historical and recent experience of inflation, both in the United States and in other countries around the world. Other chapters have sometimes included a note under an exhibit or a parenthetical reminder in the text saying that the numbers have been adjusted for inflation. In this chapter, it is time to show how to use inflation statistics to adjust other economic variables, so that you can tell how much of, for example, we can attribute the rise in GDP over different periods of time to an actual increase in the production of goods and services and how much we should attribute to the fact that prices for most items have risen. Inflation has consequences for people and firms throughout the economy, in their roles as lenders and borrowers, wage-earners, taxpayers, and consumers. The chapter concludes with a discussion of some imperfections and biases in the inflation statistics, and a preview of policies for fighting inflation that we will discuss in other chapters.

  Sign up to read

  Learn more about book