inflation

• Retail price index (RPI) and consumer price index (CPI) are common measures of price level, inflation rate fluctuates but is nearly always positive.
• The UK government publishes a CPI each month and rate of inflation is percentage increase over 12 months, this index is used throughout the EU where it generally goes under a harmonised index of consumer prices (HICP) covers virtually 100% of consumer spending (including cross border) and uses sophisticated weights for each item.
• In most developed countries the governments have a target for rate of consumer inflation, frequently around 2%, central banks adjust interest rates to try to keep inflation rate on target.
• Unpredictable changes in inflation rate are a problem as they redistribute income in arbitrary ways between employers and workers and between borrowers and lenders
• High inflation rate diverts resources from productive activities to inflation forecasting, eradicating inflation is costly because it brings a period of greater average unemployment
• Demand pull inflation - caused by continuing rises in aggregate demand therefore firms raise prices and output
• Cost push inflation - continuing rising of costs independent to aggregate demand
• Phillips curve - original showed the statistical relationship between wage inflation and unemployment in the UK, however since the 1960s experience has suggested that no relationship exists beyond the short run