Inflation
Inflation is a rise in the general level of prices. It is caused by an excess of demand over supply, and is related to an increase in the money supply. Single-digit inflation is usually described by economists as moderate inflation. Double or triple-digit inflation, which some countries have survived for quite long periods, is known as galloping inflation. Inflation of four or more digits, as in Germany in the early 1920s, and Argentina in the early 1980s, is known as hyperinflation.
Prices in general tend to remain at the same anticipated level unless there are demand-pull or cost-push shocks. If aggregate demand exceeds what a country can produce at full employment prices will rise (including wages, the prices of labour): this is demand-pull inflation. But, for the last fifty years, costs have pushed up prices and wages, even in recessions and periods of high unemployment: this is cost-push inflation. Cost-push inflation could be caused by an increase in wages owing to trade union militancy, the rising costs of imported raw materials and components or companies pushing up prices in order to improve their profit margins.
The opposite of inflation, when prices fall (generally for short periods), is deflation. Government policies can be inflationary (often by accident), disinflationary and reflationary. Disinflationary policies might be aimed at slowing down the price inflationor at reducing imports: they involve reducing demand by raising taxation and/or cutting government spending. Reflationary policies, on the contrary, involve revitalizing a sluggish economy by increasing consumer demand, either by cutting taxes or raising benefits, or relaxing monetary and credit restrictions.
Inflation is measured by the retail price index (RPI) in Britain and the consumer price index (CPI) in the US. These measure the cost of the 'basket' of goods and services, including food, clothing, housing, fuel, transport and medical care. The individual items in price indices arc weighted, meaning that allowance is made for their relative importance in people's spending.
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