Inflation: Understanding The Terms
Most commonly, the term inflation refers to an increase in the broad measure of prices, which represents the total level of prices of goods and services in an economy. Inflation seeks to measure the total effect of price changes across a diverse range of products and services, and allows a unitary representation of an increase in the price level for goods and services over an interval of time.
Inflation is defined as a general increase in price levels over time, with a decrease in the spending power of money. Inflation refers to a general increase in prices for goods and services throughout an economy over time, which reduces spending power of consumers and businesses alike. Inflation is an economic phenomenon whereby currency loses purchasing value over time because of rising prices for goods and services. Key Takeaways Inflation is a rate whereby a currencys value falls, and the overall price level for goods and services is then raised.
Rising commodity prices are an example of a "cost-push" type of inflation, as commodities increase in price, costs of essential goods and services typically rise. Cost-push inflation occurs when rising prices for input goods and services raise the prices of the finished goods and services. Another cause of inflation is when the demand for goods and services exceeds the quantity that can be produced at that point, driving prices higher. The rise in price levels (inflation) degrades the real value of money (functional currency) and other items that have an intrinsic monetary value.
A rising price level for goods indicates a loss in purchasing power for currency in a given economy.Purchasing Power ParityThe concept of purchasing power parity (PPP) is a tool used for making cross-country comparisons of national incomes and standards of living (i.e., fewer things can be bought for the same amount of money). A quantitative assessment of the rate of loss in purchasing power occurs may be captured by an increase in the average price level of a selected basket of goods and services across the economy for some time. Inflation in an economy is typically calculated by looking at a basket of goods and services and comparing changes in prices in this basket over time. Inflation is represented in a percentage, showing the rate at which a diverse group of goods changed their price levels during a given period.
Statistical agencies measure inflation by first determining the present value of a basket of the different goods and services consumed by households, called the price index. The main measures of inflation in the United States are the consumer price index (CPI), producer price index (PPI), and personal consumption expenditures (PCE), which use different measures to track changes in prices paid by consumers and received by producers across industries throughout the American economy. Inflation can also be used to describe the increase in prices in a narrow range of assets, goods, or services in an economy, such as commodities (including foodstuffs, fuels, metals), real assets (such as real estate), financial assets (such as stocks, bonds), services (such as entertainment and healthcare), or labor.
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