inflation

inflation,

in economics, persistent and relatively large increase in the general price level of goods and services. Its opposite is deflation, a process of generally declining prices. The U.S. Bureau of Labor Statistics produces the Consumer Price Index (CPI) yearly, which measures average price changes in relation to prices in an arbitrarily selected base year. While the CPI is usually considered the most reliable estimate of inflation, some economists have questioned whether it overstates inflationary trends.

Inflation results from an increase in the amount of circulating currency beyond the needs of trade; an oversupply of currency is created, and, in accordance with the law of supply and demand, the value of money decreases. Deflation is brought about by the opposite condition. In the past, inflation was often due to a large influx of bullion, such as took place in Europe after the discovery of America and at the end of the 19th cent. when new supplies of gold were found and exploited in South Africa. In modern times wars have been the most common cause of inflation, as government borrowing, the increase in the money supply, and a diminished supply of consumer goods increase demand relative to supply and thereby cause rising prices.

Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages often diminish. Stockholders make gains—often illusory—from increased business profits, but bondholders lose because their fixed percentage return has less buying power. Borrowers also gain from inflation, since the future value of money is reduced. Deflation, which historically has occurred in the downward movement of the business cycle, lowers prices and increases unemployment through the depression of business. Persistent deflation in Japan, beginning in the early 1990s, resulted in a drop in consumption, record unemployment, and general economic stagnation. Deflation in home prices after the financial collapse of 2008–9 (as opposed to deflation in goods and services prices) significantly reduced the value of the assets of many American households and proved a significant strain on the U.S. economy. An unusually steep and sudden rise in prices, sometimes called hyperinflation, may result in the eventual breakdown of an entire nation's monetary system. Among the notable examples of hyperinflation have been Germany in 1923, Hungary in 1946 (the worst recorded case), Yugoslavia in 1993–94, and Zimbabwe in 2008.

In the United States, annual price increases of less than about 2% or 3% are not considered indicative of serious inflation. During the early 1970s, however, prices rose by considerably higher percentages, leading President Nixon to implement wage-and-price controls in 1971. Stagflation–the combination of high unemployment and economic stagnation with inflation–became common in the industrialized countries during the 1970s. The costs of the Vietnam WarVietnam War,
conflict in Southeast Asia, primarily fought in South Vietnam between government forces aided by the United States and guerrilla forces aided by North Vietnam. The war began soon after the Geneva Conference provisionally divided (1954) Vietnam at 17° N lat.
..... Click the link for more information. and the social programs of the Johnson administration, plus the oil prices increases in 1974 by the Organization of Petroleum Exporting CountriesOrganization of Petroleum Exporting Countries
(OPEC), multinational organization (est. 1960, formally constituted 1961) that coordinates petroleum policies and economic aid among oil-producing nations.
..... Click the link for more information. (OPEC), contributed to U.S. inflation. By the end of the 1970s the Federal ReserveFederal Reserve System,
central banking system of the United States. Established in 1913, it began to operate in Nov., 1914. Its setup, although somewhat altered since its establishment, particularly by the Banking Act of 1935, has remained substantially the same.
..... Click the link for more information. raised interest rates in an attempt to reduce inflation. Following a recession in the early 1980s, there was renewed growth, somewhat lower interest rates, and a decrease in the inflation rate.

During the early 1990s, a downward business turn created an international recession—without significant deflation—that replaced inflation as a major problem; the Federal Reserve lowered interest rates to stimulate economic growth. The mid-1990s saw moderate inflation (2.5%–3.1% annually), even with an increase in interest rates. By the late 1990s, U.S. inflation was low (1.9% by 1998), despite record growth; it tended to be somewhat higher (roughly 2%–3.5%) in subsequent years, due largely to increases in energy costs and, to a lesser degree, to large government deficits since 2001. Beginning in 2009, however, recession and a lackluster recovery led to much lower rates (typically less than 2%) and even to minor deflation in goods and services at times.

Bibliography

See J. Ahmad, Floating Exchange Rates and World Inflation (1984); A. J. Brown, World Inflation since 1950 (1985); T. S. Sargent, The Conquest of American Inflation (1999); R. J. Samuelson, The Great Inflation and Its Aftermath (2008).

inflation

A short period of very rapid expansion of the Universe postulated to occur very soon after the big bang. The hypothesis of inflation in the early Universe solves a number of cosmological problems. One of these is the flatness problem; i.e. the problem that the Universe appears to be almost exactly Euclidean. Another of these problems is the horizon problem; i.e. the problem of why the Universe looks the same on opposite horizons in spite of there not being enough time for light to traverse the Universe. The third problem is the monopole problem; i.e. the problem of why magnetic monopoles predicted by grand unified theories are not plentiful.

If there was a period of rapid expansion when the size of the Universe was about the same as the Planck length then all these problems disappear. Space–time would become much flatter as a result of such an expansion. Before the inflation the Universe would have been sufficiently small for signals to go the very small distance from one side of it to the other.

In addition to solving these problems inflation provides a solution to the problem of structure formation in the Universe. It is postulated that quantum fluctuations in the early Universe were magnified by inflation, producing the irregularities necessary for the formation of structures. This theory made the prediction that there should be very slight variations in the temperature of the cosmic microwave background (CMB) as a result of the irregularities in the early Universe. In the early 1990s COBE found precisely the expected variations. This finding was a major success for inflation theory. The theory also predicts that the irregularities in the early Universe produced gravitational radiation with distinct features. It is hoped that sufficiently sensitive detectors will detect this radiation within the first few decades of the twenty-first century.

Although the general idea of inflation theory is very successful it has proved very difficult to link it with any particular model of elementary particle theory. Theoretical frameworks for the early Universe invoke GUTs (see fundamental forces) where the Fundamental Forces are held in a symmetry not observed in the present Universe. It is hypothesized that the state of the Universe changed at an age of 10^–35 seconds, when the electromagnetic and strong nuclear forces separated, or ‘froze out’ to different values. Mathematical solutions to this process of symmetry-breaking invoke the creation of defects in spacetime, such as monopoles and domain walls, that are not observed in the present Universe. The phase transition caused by symmetry-breaking released energy that is calculated to have caused the Universe to expand or inflate catastrophically. Inflation theory was initially proposed by Alan Guth in 1981 although his initial model was seriously flawed.

inflation

(ECONOMICS) the increase over time in the general level of prices in an economy. Inflation reduces the purchasing power of any unit of money The rate of general inflation is usually measured using an index indicating the annual increase in consumer prices, such as the RETAIL PRICE INDEX. Two main types of inflation are identified by economists:

demand-pull inflation, which occurs when there is excess demand at a time of full employment and little room exists for immediate increase in levels of output; and
cost-push inflation, arising from an increase in the costs of inputs, including labour. An alternative explanation of demand-pull inflation proposed by MONETARIST economists is excessive creation of money Historically, periods of inflation were associated with the boom phase in the movement of the trade cycle. In Western capitalist economies in recent decades, inflation has been more continuous, a state of affairs which has been explained as the outcome of a prolonged post-World War II boom, increased effectiveness of trade union power, as well as increasing government intervention to protect full employment and the creation of money by governments and banks.

Attempts to control inflation by allowing increased levels of unemployment and by controlling money supply, though they have met with some success, may be effective in reducing inflation only by restricting growth and increasing social inequalities. Income policies involving voluntary agreements between government, employers and trade unions to control wages and prices have met with only limited success.

Although inflation has been studied mainly by economists, sociologists have been concerned to explore the wider social causes and effects of the phenomenon. As suggested by social theorists such as BELL and HABERMAS, a persistent tendency to inflation in modern Western societies would appear bound up with fundamental features of the social structure of these societies, e.g. the absence of consensus on a fair distribution of income; conflicts of interest inherent in the capitalist labour contract; and the ability of big business and organized labour to increase prices and wages while ‘exporting crisis’ – unemployment or a reduction in real incomes – to weaker economic sectors. One issue concerning the effects of inflation is whether inflation, or the problems generated by attempts to control inflation, presents the bigger problem. However, most governments try to control inflation, if only because persistent inflation can lead to a serious decline in export competitiveness. See also DEFLATION, STAGFLATION, CORPORATISM, LEGITIMATION CRISIS.

Inflation

an overflow of the circulation channels with excess paper money, which leads to money depreciation and to the redistribution of social product and national income among sectors of the national economy, social classes, and population groups to the advantage of the wealthy classes.

The economic term “inflation” began to be used in the second half of the 19th century to refer to the swelling of paper money circulation, but its use became widespread only in the 20th century. However, the phenomenon of inflation itself is as ancient as the nominal money tokens to which inflation is inseparably linked. In precapitalist formations, inflation manifested itself mainly in monetary form, as coinage by the government (or by counterfeiters) of inferior coins (by weight or quality of the metal) or the introduction into circulation of copper instead of silver coins at the existing nominal value. Such an inflation led to the depreciation of coins, caused a decline of the value of money in terms of real income, and disorganized the exchange process (leading to such results as a decrease or stoppage of the supply of produce by peasants to the cities). These effects induced the authorities to take measures to regulate money circulation either by withdrawal from circulation of surplus copper money or by reduction of the nominal value of the coins. With the advent of paper money, the inflation of monetary units was displaced by paper money inflation. In the 18th and 19th centuries and before World War I, such an inflationary process was observed in various capitalist countries at various times.

As a result of inflation, paper money becomes devalued in comparison to the money commodity, that is, to gold, as well as to the sum of ordinary commodities and foreign exchange, which retains its previous real value or which devalues to a lesser degree.

With the onset of the general crisis of capitalism, inflation has acquired a universal and chronic character. After World War II, the issue of money increased enormously in a number of countries. For example, in France the money volume increased by more than 2 trillion francs from 1945 to 1955. In 1960 the government was compelled to revalue the currency: 100 francs were set equal to 1 “new franc,” which would have a gold content of 0.180000 g of pure gold. Other countries suffered similar or even more acute inflation, including China (during the regime of Chiang Kai-shek), Italy, and Japan. In some countries, inflation acquired enormous dimensions (hyperinflation). For instance, in Greece in 1944 the money volume reached 2.5 quintillion drachmas; this currency, according to official sources, was devalued 50 billion times.

The inflation process of paper money is significantly modified under contemporary capitalism. One of the acute contradictions of contemporary state-monopoly capitalism is the so-called creeping inflation, which manifests itself by continuous price increases in capitalist countries (the rate of exchange of paper money in gold and foreign exchange remains unchanged and does not reflect the devaluation), an increase in the cost of living, and the decline of foreign exchange purchasing power. From 1948 to 1968 the purchasing power of the Japanese yen and the French franc fell by 60 percent, the pound sterling by half, and the Italian lira by almost half. The inflationary processes caused sharp fluctuations of the rates of exchange of currencies of many capitalist countries (the devaluation of the pound sterling in 1967, of the French franc in 1969, and of the US dollar in 1971).

Inflation is used by a government to cover unproductive national expenditures and financial outlays of entrepreneurs in order to stimulate business activity. During inflation, wages usually lag behind the increase in commodity prices, which leads to the decline of real wages, the reduction of the costs of production under capitalism, and the strengthening of exploitation. The characteristic feature of inflation as a method of labor exploitation is that it is used not by different entrepreneurs but by the entire capitalist class through the state’s financial machinery, thus representing a disguised method of exploitation. In addition to the production and clerical workers, small producers of goods also suffer from inflation. The peasants suffer losses when buying industrial products, and the main profit from the price increase of agricultural production goes to the intermediate buyers of this production. Inflation also injures the working masses because of the devaluation of their savings. It intensifies social and class contradictions and at the height of its development leads to a disorganization of the whole process of capitalist production, to the point that monetary reform and (even if only temporarily) currency stabilization become necessary.

Under socialism, the volume of money in circulation is determined by planning in accordance with the requirements of retail commodity turnover, so that the overflow of circulation channels with surplus money is prevented. However, at certain moments a surplus of money in circulation channels may be created as a result of the financial tension brought about by emergency situations (for example, war), nonfulfillment of plans, and errors in planning. In such cases, the monetary mass is brought into conformity with the requirements of the national economy through a monetary reform or through measures of current planning regulation. Unlike capitalist practice, in a socialist system the problem of money stability is worked out in the course of planning the entire national economy as part of the broader problem of the economy’s financial balance, that is, the balance between monetary (in terms of value) and material elements of the development of the socialist economy.

inflation

1. Economics a progressive increase in the general level of prices brought about by an expansion in demand or the money supply (demand-pull inflation) or by autonomous increases in costs (cost-push inflation) 2. Informal the rate of increase of prices

inflation

Inflation

The rate at which the general level of prices for goods and services is rising.

Inflation

The reduction in the purchasing power of a currency. Inflation has historically occurred when a country prints too much of its currency in too short a period of time. Central banks attempt to control inflation by raising interest rates when necessary, which decreases the amount of money in circulation. Inflation is inevitable whenever wealth is created, but central banks attempt to keep it between 2% and 3% whenever possible. See also: Deflation, Disinflation, Inflation tax.

inflation

A general increase in the price level of goods and services. Unexpected inflation tends to be detrimental to security prices, primarily because it forces interest rates higher. A point to keep in mind is that a certain amount of inflation is already embodied in security prices. Compare deflation. See also consumer price index, core inflation, cost-push inflation, demand-pull inflation, GDP deflator, producer price index, purchasing power risk.

Inflation.

Inflation is a persistent increase in prices, often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries.

Moderate inflation typically accompanies economic growth. But the US Federal Reserve Bank and central banks in other nations try to keep inflation in check by decreasing the money supply, making it more difficult to borrow and thus slowing expansion.

Hyperinflation, when prices rise by 100% or more annually, can destroy economic, and sometimes political, stability by driving the price of necessities higher than people can afford.

Deflation, in contrast, is a widespread decline in prices that also has the potential to undermine the economy by stifling production and increasing unemployment.

Fig. 46 CPI annual percentage change. Source: Office for National Statistics.

inflation

An increase in the general level of PRICES in an economy that is sustained over time. In the UK the rate of inflation has been measured since December 2003 by a CONSUMER PRICE INDEX (CPI) in order to bring it into line with European Union practice which uses a ‘harmonised index of consumer prices’ (HICP) to provide a common formula for calculating inflation rates for EU member countries. Formerly the UK measured inflation rates in two main ways: the RETAIL PRICE INDEX (RPI all items) the ‘headline inflation rate’, and the Retail Price Index (RPIX) which excludes mortgage interest payments – the ‘underlying inflation rate’. The CPI is now used to monitor the inflation rate for purposes of applying the government's macroeconomic policy in general and MONETARY POLICY in particular (see RETAIL PRICE INDEX). Fig 46 shows movements in these three indices over the period October 1999 to October 2001. Because of the distorting effects of inflation on the functioning of the economy and the harm it does to certain sections of the community (particularly those people on fixed incomes), most governments accord a high priority to the control of inflation when formulating their ECONOMIC POLICIES.

There are two main causes of inflation:

the presence of excess demand beyond the output capacity of the economy to supply goods and services, which ‘pulls up’ prices (demand-pull inflation);
an increase in input costs – wages, raw materials and components – which ‘push up’ final prices (cost-push inflation).

According to the monetarist school (see MONETARISM), demand-pull inflation is caused by the excessive creation of money and they prescribe strict controls on the MONEY SUPPLY as a means of reducing excess spending (see MONETARY POLICY). Likewise the Keynesian school advocates cuts in spending as the way of tackling excess demand, but in their case mainly by increasing taxes and reducing government expenditure (see FISCAL POLICY). Cost-push inflation tends to be associated particularly with excessive increases in money wage rates (i.e. wage rates greater than can be paid for by increases in the underlying rate of productivity growth) and with occasional explosions in commodity prices (the OPEC oil price increases of 1973 and 1979 being a case in point). Cost-push inflation caused by excessive wage demands can be modified or eliminated either directly by the use of controls on prices and incomes or more indirectly by ‘moral suasion’ and measures to reduce the monopoly power of trade unions.

In the past most UK governments have not formulated monetary policy with any specific inflation ‘target’ in mind. The present government, however, has committed itself to an annual inflation rate target of not more than 2%, and the remit of the MONETARY POLICY COMMITTEE at the Bank of England is to set official INTEREST RATES so as to achieve this target. The ‘thinking’ behind this strategy is that a low inflation economy is essential in order to create stable monetary conditions and thus lower unemployment. Likewise, in the European Union (EU) the EUROPEAN CENTRAL BANK (under Maastricht Treaty ‘convergence’ criteria for ECONOMIC AND MONETARY UNION) has set an average EU-wide inflation rate target of not more than 2%.

In general the business community dislikes inflation. It is administratively inconvenient and expensive constantly to change price lists and allow for the effects of inflation on firms' cashflow positions and the valuation of assets (see INFLATION ACCOUNTING). A more important consideration is the effect of inflation on firms' competitive positions in the domestic and overseas markets against foreign rivals. Specifically, high rates of inflation, unless offset by compensatory EXCHANGE RATE movements, have the effect of making imports relatively cheaper and exporting more expensive, thus putting firms at a growing price disadvantage or squeezing their profit margins. See PURCHASING POWER, INDEX-LINKED.

(d) Fig. 93 Inflation. (d) In the EQUILIBRIUM LEVEL OF NATIONAL INCOME model, inflation occurs whenever AGGREGATE DEMAND exceeds full employment aggregate supply (POTENTIAL GROSS NATIONAL PRODUCT): equilibrium national income in the Fig. is OY₂, and if aggregate demand AD₂ exceeds full employment demand AD₁, an INFLATIONARY GAP develops. The traditional prescription for this situation is for the authorities to reduce spending by deflationary FISCAL POLICY and MONETARY POLICY measures - to shift aggregate demand from AD₂ to AD₁ .

(c) Fig. 93 Inflation. (c) Consumer price increases, GROUP OF 7,1981–2003. Source: World Economic Outlook, IMF, 2004.

Fig. 93 Inflation. (a) UK Consumer Price Index (CPI), 1996–2004. Source: Office for National Statistics, 2004.

(b) UK Inflation and UNEMPLOYMENT, 1984–2004. Source: Office for National Statistics, 2004.

inflation

An increase in the general level of prices in an economy that is sustained over a period of time. The annual increases in prices may be small or gradual (creeping inflation), or large and accelerating (hyperinflation). In the UK, the rate of inflation has been measured since December 2003 by a CONSUMER PRICE INDEX (CFI) in order to bring it into line with European Union practice, which uses a ‘harmonized index of consumer prices’ (HICP) to provide a common formula for calculating inflation rates for EU member countries. Formerly, the UK measured inflation rates in two main ways: the RETAIL PRICE INDEX (RPI all items), the ‘headline inflation rate’ and the Retail Price Index (RPIX), which excludes mortgage interest rates - the ‘underlying inflation rate’. The CPI is now used to monitor the inflation rate for purposes of applying the government's macroeconomic policy in general and MONETARY POLICY in particular. Fig. 93 (a) shows movements in the CPI since 1996. Fig. 93 (b) shows changes in the UK's underlying inflation rate (together with the (b) UNEMPLOYMENT RATE and the Consumer Price Index) over the period 1984–2004, and Fig. 93 (c), provides some international comparisons.

Inflation reduces the PURCHASING POWER of money (see REAL VALUES).

The avoidance of inflation has long been one of the main objectives of MACROECONOMIC POLICY. Inflation is considered to be undesirable because of its adverse effects on income distribution (people on fixed incomes suffer), lending and borrowing (lenders lose, borrowers gain), speculation (diversion of saving away from industry into property and commodity speculation), international trade competitiveness (exports become relatively more expensive, imports cheaper) and unemployment. Hyperinflation is particularly serious because people lose confidence in the use of money for exchange purposes and the economic system is liable to collapse.

There are two main explanations of why inflation occurs:

the presence of excess demand at the full employment level of national output, which pulls up prices (DEMAND-PULL INFLATION): see Fig. 93 (d) ;
an increase in FACTOR INPUT costs (wages and raw materials) that pushes up prices (COST-PUSH INFLATION).

According to the monetarist school (see MONETARISM), demand-pull inflation is caused by the excessive creation of money, and they prescribe strict controls on the MONEY SUPPLY and higher INTEREST RATES as a means of reducing excess spending (see MONETARY POLICY). Likewise, the Keynesian school advocates cuts in spending as the way of tackling excess demand, but in their case mainly by increasing taxes and reducing government expenditure (see FISCAL POLICY). Cost-push inflation tends to be associated particularly with excessive increases in money wage rates (i.e. wage rates greater than can be paid for by increases in the underlying rate of productivity growth) and with occasional explosions in commodity prices (the OPEC oil price increases of 1973,1979 and 2004 being a case in point). Cost-push inflation caused by excessive wage demands can be modified or eliminated either directly by the use of controls on prices and incomes (see PRICES AND INCOMES POLICY) or more indirectly by ‘moral suasion’ and measures to reduce the monopoly power of trade unions (see UNEMPLOYMENT LAWS).

Modern economists posit an association between inflation and UNEMPLOYMENT. Specifically, they suggest that there is an inverse relationship between inflation and unemployment as depicted by the so-called PHILLIPS CURVE ‘trade-off. This shows that there is a ‘natural’ rate of unemployment below which level it is not possible to reduce unemployment without increasing inflation. Furthermore, some economists argue that inflation itself can cause unemployment by increasing money wages and consumer prices, leading to labour ‘pricing itself out of jobs’ and domestic products becoming uncompetitive against lower-priced foreign imports. (See EXPECTATIONS ADJUSTED/AUGMENTED PHILLIPS CURVE.)

In the past, most UK governments have not formulated monetary policy with any specific inflation ‘target’ in mind. The present government, however, has committed itself to an annual inflation rate target of not more than 2% in the Consumer Price Index, and the remit of the MONETARY POLICY COMMITTEE at the Bank of England is to set official INTEREST RATES so as to achieve this target. The ‘thinking’ behind this strategy is that a low-inflation economy is essential in order to create stable monetary conditions and thus lower unemployment. Likewise, in the European Union (EU) the EUROPEAN CENTRAL BANK (under the Maastricht Treaty ‘convergence’ criteria for ECONOMIC AND MONETARY UNION) has set an average EU-wide inflation rate target of not more than 2%. See INFLATIONARY SPIRAL, PURCHASING POWER, TRANSMISSION MECHANISM, ADAPTIVE EXPECTATIONS HYPOTHESIS, QUANTITY THEORY OF MONEY, INDEXATION, INTERNAL-EXTERNAL BALANCE MODEL, NEW AND OLD PARADIGM ECONOMICS.

inflation

A loss in the purchasing power of money. Inflation is generally measured by the consumer price index.

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Synonyms for inflation

noun increase

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noun a general and progressive increase in prices

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noun (cosmology) a brief exponential expansion of the universe (faster than the speed of light) postulated to have occurred shortly after the big bang

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noun lack of elegance as a consequence of being pompous and puffed up with vanity

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noun the act of filling something with air

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