What is inflation? Please elaborate! ~

Inflation initially refers to the phenomenon of currency depreciation caused by the circulation of paper money exceeding the actual demand in commodity circulation. The circulation law of paper money shows that the circulation of paper money cannot exceed the symbolic amount of gold and silver. Once this amount is exceeded, paper money will depreciate and prices will rise, leading to inflation. Inflation will only happen when paper money is in circulation, but it will not happen when gold and silver money are in circulation. Because gold and silver money itself has value, as a means of storage, it can spontaneously adjust the amount of money in circulation to meet the amount of money needed for commodity circulation. Under the condition of paper money circulation, because paper money itself has no value, it is only a symbol representing gold and silver currency and cannot be used as a means of storage. Therefore, if the circulation of paper money exceeds the quantity needed for commodity circulation, it will depreciate. For example, the amount of gold and silver money needed for commodity circulation is constant, and the circulation of paper money is more than twice that of gold and silver money, so the unit paper money can only represent 1/2 of the unit gold and silver money value. In this case, if the price is measured by paper money, the price will double, which is commonly known as currency depreciation. At this time, the number of paper money in circulation has doubled compared with the number of gold and silver money needed in circulation, which is inflation. In macroeconomics, inflation mainly refers to the general rise of prices and wages.

Inflation in modern economics refers to the rise of the overall price level. Generalized inflation refers to the decline in the market value or purchasing power of money, while currency depreciation refers to the decline in the relative value between two economies. The former is used to describe the value of domestic currency, while the latter is used to describe the added value in the international market. The correlation between them is one of the disputes in economics.

The antonym of inflation is deflation. No inflation or low inflation is called a stable price.

In many cases, the word inflation means increasing the money supply, which sometimes leads to higher prices. Some (Austrian school) scholars still use the word inflation to describe this situation, rather than the price increase itself. For this reason, some observers refer to the situation in the United States in the 1960s+0920s as "inflation", although prices did not rise at that time. As described below, unless otherwise specified, the term "inflation" refers to the general price increase.

The antonym of inflation can be "reflation", that is, in the case of deflation, prices rise or the degree of deflation decreases. In other words, although the overall price level has dropped, the range has narrowed. The related word is "en:disinflation", that is, the rising speed of inflation has slowed down, but it is not enough to cause deflation.

Measure inflation

The measurement of inflation is obtained by observing a large number of changes in labor income or commodity prices in an economy, usually based on data collected by the government, and trade unions and business magazines have also done such surveys. Price and labor income together constitute the price index, which is the benchmark for measuring the average price level of the whole commodity group. The inflation rate is an exponential increase. The price level measures the overall price, while inflation refers to the rise of the overall price.

There is no exact measure of inflation, because the inflation value depends on the price proportion of each specific item in the price index and the scope of the economic region to be measured. Common measurement methods include:

Cli (cost of living index) is the theoretical increase of personal cost of living, which is estimated by the consumer price index. Economists have different views on whether a specific cpi value should be estimated higher or lower than the cli value. This is because the cpi value is considered as "deviation". Cli can be adjusted by purchasing power parity (PPP) to reflect the huge gap between regional commodities and world prices.

Consumer price index (CPI) measures the price of goods purchased by "typical consumers". In many industrialized countries, the annual percentage change of the index is the most commonly used inflation curve report. This measurement method is usually used in salary negotiation because employees want their salary (nominal) to be equal to or higher than cpi. Sometimes, the labor contract will include the escalator fee, which means that the nominal salary will be automatically adjusted with the increase of cpi, and the timing of adjustment is usually lower than the actual inflation rate after inflation.

Producer price index (ppi) measures the price of materials purchased by producers, which is different from cpi in terms of price subsidies, profits and tax burden, resulting in a gap between producers' income and consumers' contribution. When cpi rises, Ppi rises, with typical delay. Although it has diversified combinations, it is generally believed that this delay makes it possible to roughly prepare for tomorrow's cpi inflation according to today's ppi inflation; There are very important differences between various words and contents.

The wholesale price index measures the wholesale price changes of selected commodities (especially sales tax), which is very similar to ppi.

Commodity price index measures the price changes of some commodities. If the gold standard is used, the commodity of choice is gold. The United States adopts a multi-standard system, and its index includes both gold and silver.

Gdp deflator is a calculation based on gdp: the ratio of money used between nominal gdp and inflation-adjusted gdp (i.e. constant price gdp or real GDP) (see real and nominal economy). This is the most macroscopic measure of the price level. This index is also used to calculate the components of GDP, such as personal consumption expenditure. The United States Federal Reserve uses the core personal consumption deflator and other deflators as a reference for formulating "anti-inflation policies".

Price index of personal consumption expenditure. On February 17, 2000, FOMC (Federal Open Market Committee) announced in the semi-annual humphrey-hawkins report of Congress that it would change the main measure of inflation from cpi to the price index of individual consumption expenditure.

Because each measurement method is based on other measurement methods and combined with a fixed model, economists often argue whether there is a' deviation' between each measurement method and the inflation model. For example, the boskin Committee found that the cpi calculated by the Bureau of Statistics (bls) of the US Department of Labor was biased at 1995. After quantitative analysis of its deviation, they think that the inflation of that year was greatly exaggerated. (hedonism theory) brought about by the increase of scientific and technological innovation, replacing expensive goods with cheap ones will reduce the growth rate of CPI-U. For example, in the early 1980 s, uninhabited rental units were not included in the rental income of CPI-U and CPI-W. After adding this part, the inflation rate is actually extremely underestimated, so this change is added to the cpi calculation of 1982.

The current debate is whether to include the adjustment of happiness theory, including that when high-priced areas are out of reach, people will move to cheaper areas. Some people think that the purchase part of the index greatly underestimates the impact of daily living expenses on housing prices, and also greatly underestimates the importance of medical expenses in the daily expenses of retirees.

The role of inflation in economics

One of the effects of stable and small inflation is that it is difficult to renegotiate price cuts, especially wages and contracts. Therefore, if the price rises slowly, the relevant prices will be easier to adjust. There are many kinds of prices that will be' up for grabs', but will rise quietly. Therefore, the effect of zero inflation will affect other aspects by reducing prices, profits and the number of employees. Therefore, the executive departments of several companies regard moderate inflation as a' lubricated merchant ship'. Pursuing complete price stability will bring about devastating deflation (continuous price decline), which will lead to bankruptcy and economic recession (even economic depression).

The financial system regards the "potential risk" of inflation as the basic investment motive higher than saving to accumulate wealth. In other words, inflation is the market description of the time value of money. In other words, because one yuan today is more valuable than one yuan next year, the future capital value will be deducted in economics. This view holds that inflation is the uncertainty of future capital value.

For the lower classes, inflation usually increases the negative impact of discounting before economic activities. Inflation is usually caused by the government's policy of improving money supply. What the government can do about inflation is to tax stagnant funds. When inflation rises, the government raises the tax burden of stagnant funds to stimulate consumption and borrowing, which increases the flow speed of funds, strengthens inflation and forms a vicious circle. In extreme cases, hyperinflation will be formed.

More and more uncertainty may hit investment and savings.

Redistribution

Those who get a fixed income, such as pensions, may be redistributed to those who don't, and most of the wage income is used to deal with inflation.

Similarly, a lender with a fixed amount may redistribute its assets to the lender (if the lender is caught off guard by inflation or cannot adjust the amount). For example, the government is usually a lender, and reducing government debt will redistribute funds back to the government. This situation is sometimes referred to as inflation tax.

International trade: If the domestic inflation rate is low, the reduction of the trade balance will destroy the fixed exchange rate.

Shoe sole cost: Because the value of cash will shrink when inflation occurs, people tend to hold less cash when inflation occurs. This word means that the actual cost will flow more to banks. The word "sole cost" is a joke, which means the cost of wearing soles because of walking to the bank. )

Menu cost: enterprises should make greater efforts to change product prices. This word means the cost of reprinting menus in restaurants.

Hyperinflation: If inflation is out of control, it will interfere with normal economic activities and damage the supply capacity.

In an economy, some sectors will be included in the inflation index, while others will not, and the inflation behavior will be redistributed from non-included sectors to included sectors. When the impact is small, this is a policy choice, and the liquidation priority and funds on hand are taxed instead of savings. If the impact exceeds a certain range, its effect will be distorted and become an individual's' investment' in inflation, that is, the expectation of fueling inflation.

Because the above reasons for fighting inflation are higher than the small shock needed to fight their expected behavior and hold a lot of money, most central banks aim at visible but extremely low inflation in consideration of price stability.

Pain index (pain index)

The misery index, published in 1970' s, represents an unpleasant economic situation and is equal to the sum of inflation rate and unemployment rate. Its formula is: pain index = inflation percentage+unemployment percentage, which means that the general public feels the same degree of unhappiness about the same growth of inflation rate and unemployment rate. Modern economists do not agree to use the word' pain' which is completely negative to describe the negative impact of the above inflation mechanism. In fact, many economists believe that the public's prejudice against moderate inflation comes from their interaction: the public only remembers the economic difficulties related to the period of high inflation. From the point of view of modern economists, moderate inflation is an unimportant economic problem, which can be partially prevented by fighting [stagflation] (which may be stimulated by [monetarists]).

Many economists (especially in Japan) advocate that the economic recession should be solved by raising inflation.

All the surveys on inflation show that there are differences between neoclassical economists and the general public on the damage caused by moderate inflation: the general public still thinks the damage is serious, while financial economists think it is irrelevant, and many scholars even say it is harmless at all.

Because of the redistributive nature of inflation, the view against bearing the burden of inflation lags behind. Because the capital gains tax is a symbolic amount, inflation is called as important as the' rich tax', and a society with low inflation tends to gather wealth.

Causes of inflation

Different schools have different theories about the causes of inflation.

Monetarism explanation

The most widely known and direct theory of inflation is that inflation is caused by the fact that the money supply rate is higher than the economic scale growth. The theory advocates comparing the gdp deflator with the growth of money supply, and the central bank sets interest rates to maintain the amount of money. This view is different from the following Austrian school, which focuses on the quantity rather than the essence of money. Under the framework of monetarism, the concentration of money is the key point.

The theory of money quantity is simply that the total amount of money consumed by an economy depends on the total amount of existing money. Since then, the following formula has been created:

P is the price level of general consumer goods, dc is the total demand of consumer goods, and sc is the total supply of consumer goods. The idea behind the formula is that when the total supply of social consumer goods decreases relative to the total demand of social consumer goods, or when the total demand of social consumer goods increases relative to the total supply of social consumer goods, the prices of general consumer goods will increase accordingly. Based on the view that the total expenditure is mainly based on the existing monetary aggregate, economists calculate the total demand of consumer goods through the monetary aggregate. Therefore, they come to the conclusion that total expenditure and total demand for consumer goods increase with the increase of total money. Therefore, scholars who believe in the quantity theory of money also believe that the only reason for rising prices is economic growth (indicating that the total supply of consumer goods is increasing), and the central bank uses monetary policy to increase the existing total amount of money.

From this perspective, the most fundamental reason for inflation is that the money supply exceeds the demand, so' inflation is a monetary phenomenon, which will definitely happen anywhere', Friedman said. This means that controlling inflation depends on monetary and financial restrictions. The government cannot make it too easy to borrow, nor can it lend too much. This view focuses on the central government budget deficit and interest rates, as well as economic productivity, that is, cost-driven inflation driven by production costs (total supply).

Neo-Keynesianism (neo-Keynesianism)

According to neo-Keynesianism, there are three main forms of inflation, which are part of Robert Gordon's "triangle model":

Demand-driven inflation-inflation occurs in gdp caused by high demand and low unemployment rate, also known as Phillips curve inflation.

Cost-driven inflation-now called '(supply shock inflation'-occurs when oil prices suddenly rise.

Intrinsic inflation)-caused by reasonable expectations, usually related to the price/wage spiral. Workers want to keep raising wages, and their expenses are passed on to the cost and price of products, forming a vicious circle. What has happened in the internal inflation reaction is regarded as residual inflation, also known as "inertial inflation" or even "structural inflation".

These three types of inflation can be combined at any time to explain the current inflation rate. However, most of the time, the first two kinds of inflation (and its actual inflation rate) will affect the size of internal inflation: persistent high (or low) inflation will promote the increase (or decrease) of internal inflation.

Triangular model has two basic elements: moving along Phillips curve, such as low unemployment rate stimulating inflation; And shift its curve, such as the impact of rising or falling inflation on the unemployment rate.

Phillips curve (or demand side) inflation theory

Demand-driven theory mainly focuses on money supply: inflation can be related to economic supply (its potential output) through the amount of money in circulation. This is particularly obvious when the government (possibly during a foreign war or civil war) excessively prints money and causes a financial crisis, sometimes leading to hyperinflation and soaring prices (or doubling prices every month).

Money supply also plays a major role in moderate inflation, but its importance is controversial. Monetarist economists believe that there is a strong connection; On the contrary, Keynesian economists emphasize the role of aggregate demand, and money supply is only the decisive factor of aggregate demand.

The basic concept of Keynesian explanation method is the relationship between inflation and unemployment rate, which is called Phillips curve model. This model trade-off); Between price stability and unemployment rate; Therefore, in order to reduce the unemployment rate as much as possible, a certain degree of inflation can be allowed. Phillips curve model perfectly describes the experience of the United States in1960s, but it is not enough to explain the combination of rising inflation and economic stagnation it encountered in1970s. Now Phillips curve is used to link the relationship between wage growth and general inflation instead of unemployment rate and inflation rate.

Displacement of Phillips curve

Because supply shock and inflation have become the fixed factors of economic activities, the contemporary overall economy uses the "displacement" Phillips curve (and the balance between price stability and unemployment rate) to describe inflation. Supply shock means 1970 oil price shock, while intrinsic inflation means price/wage cycle and inflation expectation, which means that inflation is tolerable under normal economic conditions. So the Phillips curve only represents the demand-driven inflation in the triangle model.

Another view of Keynesianism is that potential output (sometimes called gross domestic product)-that is, the gdp level of an economy under the condition of reaching the highest productivity-is a habitual and inherent limitation. This output standard corresponds to Nairu-inherent unemployment rate, natural unemployment rate or full-time unemployment rate. Under this framework, the internal inflation rate is determined by the number of labor in the economy:

When gdp exceeds its potential level (and the unemployment rate is lower than nairu). The theory points out that, other things being equal, as suppliers raise prices, inflation will intensify, while internal inflation will worsen. In addition, the Phillips curve will be stagflation towards high inflation and high unemployment. This kind of "accelerated inflation" appeared in the United States in the 1960 s, when the expenditure of the Vietnam War (offset by a small tax increase) kept the unemployment rate below 4% for several years.

Gdp is lower than its potential level (and the unemployment rate is higher than nairu). Other things being equal, as suppliers try to cut prices, the market absorbs excess and underestimates internal inflation, and inflation drops. That is to stop inflation. It will lead the Phillips curve to the expected direction of low inflation and low unemployment. Curbing inflation appeared in the United States in the1980s. At that time, the anti-inflation measures taken by Federal Reserve Chairman Ben Paul Volcker led to the high unemployment rate for several years, including two years as high as 10%.

When gdp is equal to its potential level (while the unemployment rate is equal to nairu), as long as there is no supply shock, the inflation rate will remain unchanged. In the long run, most neo-Keynesian economists believe that the Phillips curve is vertical. In other words, if the inflation rate is high enough to overwhelm the unemployment rate, then the unemployment rate is the premise, which is equivalent to nairu.

However, taking this theory as the goal of policy formulation is flawed. The number of potential outputs (and nairu) is usually unknown and will change over time. In addition, the occurrence of inflation rate is asymmetric, and the rising speed is faster than the falling speed; To make matters worse, it often changes with policies. For example, during the reign of Prime Minister Thatcher, the unemployed found themselves in structural unemployment, that is, they could not find suitable employment opportunities in the British economy. At that time, the high unemployment rate in Britain may have increased nairu (and reduced its potential). When an economy avoids crossing the threshold of high inflation, the rising structural unemployment rate means that only a small amount of manpower can find employment opportunities in Nairobi.

If nairu and potential output are assumed to be unique and realized soon, then most non-Keynesian inflation theories can be understood as being included in the new Keynesian viewpoint. When the "supply side" is fixed, inflation depends on total demand. Fixed supply also means that the expenditures of public and private institutions will inevitably conflict with each other. Therefore, the government's deficit expenditure will crowd out the private sector, but it will not affect the employment level. In other words, capital supply and financial policy are the only factors that can affect inflation.

Supply side theory

Supply-side economic theory assumes that inflation is inevitably caused by oversupply of funds and insufficient demand for funds. For these two factors, the amount of funds is purely a subject matter. Therefore, the inflation in Europe during the epidemic of the Black Death in the Middle Ages can be considered to be caused by the decrease in capital demand; /kloc-inflation in the 1970s can be attributed to the oversupply of funds in the United States after it broke away from the gold standard set by the Bretton Woods system. The supply school assumes that when the supply and demand of funds increase at the same time, it will not lead to inflation.

An element expounded in the supply-side economic theory says that the economic expansion led by low tax burden in the United States in the11980 s was the means to end high inflation. The argument is that economic expansion increases the demand for basic funds, which offsets the impact of inflation. Economic expansion can be regarded as frequent and high demand for funds, and other conditions are equivalent to increasing the amount of funds. In the international money market, this policy is indisputable. Supply-side economic theory holds that economic expansion not only improves the domestic evaluation of funds, but also improves the international evaluation.

Anti-inflation

Central banks such as the Federal Reserve can strongly influence the inflation rate by setting interest rates and other monetary policies. High interest rate (and slow growth of capital demand) is a typical anti-inflation measure for the central bank to curb price rise by reducing employment and production.

However, central banks in different countries have different views on controlling inflation. For example, some central banks pay close attention to symmetric inflation targets, while others only control inflation when it is too high. The European Central Bank was accused of adopting the latter in the face of high unemployment.

Monetarists focus on raising interest rates by reducing the supply of funds through financial policies. On the other hand, Keynesians usually focus on reducing demand by increasing taxes or reducing government spending. Part of its explanation of financial policy comes from Robert Soro's research results on the rise of commodity prices. The anti-inflation methods advocated by the supply school are: fixing the exchange rate between currency and fixed reference such as gold, or reducing the marginal tax rate in the floating currency structure to encourage the formation of capital. All these policies can be achieved through open market operations.

Another method is to directly control wages and prices (see income policy). The United States tried this method in the early 1970s when Nixon was in power. A major problem is that these policies are implemented while stimulating demand. Therefore, supply-side constraints (control means, potential output) conflict with demand growth. Economists generally believe that price control is a bad practice, because it leads to shortage, reduces production quality and distorts economic operation. However, in order to avoid the cost increase caused by severe economic recession, or to resist wartime inflation, this may be worthwhile.

In fact, price control may make economic recession more influential by fighting inflation (increasing unemployment by reducing demand), and economic recession can prevent price distortion caused by control when demand is high.