If people expect high inflation, it tends to be self-fulfilling. When expectations are low, temporary rise in prices tend to be short-lived and fade away. If the Central Bank prints more money, you would expect to see a rise in inflation.
This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply.
This is because, in a recession, an increase in the money supply may just be saved, e. See: The link between money supply and inflation. However, these tax rises are likely to be one-off increases. When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.
The attitude of the monetary authorities is important; for example, if there was an increase in AD and the monetary authorities accommodated this by increasing the money supply then there would be a rise in the price level.
Summary of the main causes of inflation Demand-pull inflation — aggregate demand growing faster than aggregate supply growth too rapid Cost-push inflation — For example, higher oil prices feeding through into higher costs. Devaluation — increasing cost of imported goods, and also the boost to domestic demand. Expectations of inflation — High inflation expectations causes workers to demand wage increases and firms to push up prices.
Video summary Factors affecting inflation 1. Demand-pull inflation If the economy is at or close to full employment, then an increase in aggregate demand AD leads to an increase in the price level PL. Demand-pull inflation can be caused by factors such as Higher wages. Increased consumer confidence. Rising house prices — causing positive wealth effect.
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January Baumol, William J. Economics; Principles and Policy. Harcourt Brace Jovanovich, Publishers. San Diego. McConnell, Campbell R. McGraw-Hill, Inc. New York. Sameulson, Paul A. Irwin McGraw-Hill. Skip to content Readability Tools. Reader View. Dark Mode. High Contrast. Reset All. Publications What are some of the factors that contribute to a rise in inflation? And a lot of inflation is an expectations game, anyway. Do we do more in terms of speeding up this recovery?
Or do we play it safe and let the recovery chug along and lower the risk of inflation? Here are some of the big questions shaping the debate. To put it plainly, inflation is a general rise in prices. Probably the best-known and most discussed measure of inflation in the US is the Consumer Price Index CPI , which measures the average change in prices paid by urban consumers for things like food, clothes, housing, and transportation.
The Social Security Administration uses an index called CPI-W, which is price increases for urban wage earners and clerical workers, to calculate cost-of-living changes to determine benefits. The CPI has some weird facets to it. For example, it takes into account out-of-pocket medical expenses but not, say, an increase in what Medicare pays for care. It tends to capture a broader picture of spending and contemplates substitution among goods when something gets more expensive — so if the price of bananas goes up, it takes into account that some people will start buying apples instead.
For a more concrete example, consider the CPI numbers for April The index was up 0. And Core CPI was up 0. Compared to a year ago, the index was up 4. When you get rid of food, gas, and used cars the price of which increased by 10 percent over the course of a month , year-over-year inflation was 2. Energy prices, overall, are up 25 percent over the past year, including nearly 50 percent for gas. Inflation is not something that should be keeping you up at night.
Investors are beginning to say that they are more worried about inflation than the pandemic, and bond yields, often a sign that investors expect inflation, have gone up. A small amount of inflation can be a sign of a healthy economy.
The measures policymakers might take to combat inflation, or to stave it off once fears rise about it, could harm the economy too by cutting off growth too fast. The expectation of inflation also matters because those expectations can affect how businesses and people behave. If businesses think inflation is coming, they might increase prices, and that can push inflation up. In fact, the central bank now says its goal is an average inflation target of 2 percent over the long term, meaning it might let inflation run over 2 percent for a while before trying to get it under control.
After all, low and stable inflation is essential for a well-functioning economy. Airfares were going up before Covid, but once the pandemic hit, they plummeted. Meanwhile, the price of new and used vehicles went up. Prices have increased significantly in areas such as health care and housing for quite some time.
Some types of inflation are particularly painful and become the focus of specific policy debates, such as prescription drug prices, especially with an aging population. Different price forces, in aggregate, tend to balance one another out in topline numbers. Before the pandemic, the unemployment rate had fallen by quite a bit, to the point that typical economic thinking would have said it should have caused inflation to rise. Unemployment and inflation are often thought to have an inverse relationship.
Again, there are longstanding debates among economists and policymakers about inflation.
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