Macro 9- Inflation measures, causes and costs

• Inflation a sustained rise in an economy's general price level
• deflation general decline in prices for goods and services
• disinflation temporary slowing of the pace of price inflation
• hyperinflation rapid increases of general price in an economy
• CPI index based on the average price level of a basket of goods commonly purchased by a household
• RPE An index based on average price of a basket of goods including price of housing
• CPI formula Cost of market basket in current period/cost of market basket in base period * 100
• Real wage Nominal wage x Old CPI / new CPI
• Cost push inflation increase in price of factor inputs which is translated to an increase in cost of production
• Demand pull inflation Inflation caused by an increase in demand when resources are too scarce
• Costs of inflation

  loss of purchasing power

  increase in demand for wages

  Fiscal drag- workers receive more income in line with inflation which increases rate of income tax -consumer prices spiral- hyperinflation
• benefits of low and stable inflation workers get more wages- more motivated consumption is natural firms reduces real value of debt improves government finances