Unit
- Inflation defined: A sustained increase in the general price level of goods and services over a period, reducing the purchasing power of a currency. It is measured as an annual percentage change in a price index.
- Creeping inflation: A mild, gradual rise in prices, typically 1-3% per year, often considered healthy for economic growth as it encourages spending and investment without destabilizing expectations.
- Walking inflation: A moderate rate of 3-10% annually, which can distort consumer behavior and savings patterns, prompting central banks to intervene with tighter monetary policy.
- Galloping inflation: Rapid price increases of 10-50% or more per year, causing severe economic distortion, capital flight, and currency depreciation, as seen in some emerging economies during crises.
- Hyperinflation: An extreme form where prices rise more than 50% per month, leading to a breakdown of monetary exchange, hoarding of goods, and collapse of financial systems, requiring drastic currency reform.
- Core inflation: A measure that excludes volatile items like food and energy to reveal underlying inflation trends, used by policymakers to gauge persistent price pressures.
- Headline inflation: The raw inflation figure including all items in the basket, reflecting the actual cost of living for consumers, often more volatile than core measures.
- Disinflation: A slowdown in the rate of inflation, where prices still rise but at a decreasing pace, indicating cooling economic activity; differs from deflation.
- Demand pull inflation: Inflation driven by excess aggregate demand over available supply, often during periods of strong economic growth and low unemployment. Consumers bid up prices for goods and services, and central banks typically respond by raising interest rates to cool spending and restore balance.
- Cost push inflation: Inflation that arises from rising production costs, such as higher wages or raw material prices, which firms pass on to consumers. This type can lead to stagflation when combined with stagnant economic growth, posing a challenge for policymakers who face conflicting trade offs.
- Built in inflation: A self perpetuating cycle where workers demand higher wages to keep pace with rising living costs, and firms increase prices to cover those wages, further fueling inflation. Also known as a wage price spiral, it often becomes entrenched without decisive central bank action.
- Imported inflation: Inflation that occurs when a country experiences rising prices due to costlier imports, either from currency depreciation or global price increases for essential goods like oil and food. It reduces domestic purchasing power and can persist even when local demand is weak.
Regulatory Requirement
Regulation: Central Bank Mandates (e.g., Federal Reserve, ECB, Bank of Japan)
Most central banks target a specific inflation rate, commonly around 2% annually, to maintain price stability and support full employment. These targets guide monetary policy decisions and anchor inflation expectations among market participants.
Quick Revision
- Inflation is a persistent rise in the general price level, reducing currency purchasing power.
- Types range from creeping (50% monthly).
- Core inflation strips out food and energy for underlying trend analysis.
- Central banks target inflation to manage economic stability.