Inflation rates around the world.

Annual inflation rates in the U.S., 1666-2004.

Inflation is defined as a sustained increase in general price levels for some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index.^[1] A variety of inflation measures are in use, because there are many different price indices, designed to measure different sets of prices that affect different people. Two widely known indices for which inflation rates are commonly reported are the Consumer Price Index (CPI), which measures nominal consumer prices, and the GDP deflator, which measures the nominal prices of goods and services produced by a given country or region. Cosmology, from the Greek: κοσμολογία (cosmologia, κόσμος (cosmos) order + λογια (logia) discourse) is the study of the Universe in its totality, and by extension, humanitys place in it. ... In physical cosmology, cosmic inflation is the idea that the nascent universe passed through a phase of exponential expansion that was driven by a negative-pressure vacuum energy density. ... Image File history File links Size of this preview: 800 × 367 pixelsFull resolution (1369 × 628 pixel, file size: 60 KB, MIME type: image/png) File historyClick on a date/time to view the file as it appeared at that time. ... Image File history File links Size of this preview: 800 × 367 pixelsFull resolution (1369 × 628 pixel, file size: 60 KB, MIME type: image/png) File historyClick on a date/time to view the file as it appeared at that time. ... Image File history File links US_Historical_Inflation_Ancient. ... Image File history File links US_Historical_Inflation_Ancient. ... This article does not cite its references or sources. ... It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ... In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. ...

Mainstream economists overwhelmingly agree that high rates of inflation are caused by high rates of growth of the money supply. Views on the factors that determine moderate rates of inflation, especially in the short run, are more varied: changes in inflation are sometimes attributed mostly to changes in the real demand or supply of goods and services, and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation (at moderate rates): the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply. In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Nominal value is the value of anything expressed in money of the day, versus real value which removes the effect of inflation. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ... Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ...

Related concepts

Related economic and inflation concepts include: deflation, a general falling level of prices; disinflation, the reduction of the rate of inflation; hyperinflation, an out-of-control inflationary spiral; stagflation, a combination of inflation and rising unemployment; and reflation, which is an attempt to raise prices to counteract deflationary pressures. “Deflation” redirects here. ... Disinflation is a decrease in the rate of inflation. ... Certain figures in this article use scientific notation for readability. ... This article uses excessive clichés and jargon. ... This article is in need of attention from an expert on the subject. ...

In classical political economy, inflation meant increasing the money supply, while deflation meant decreasing it (see Monetary inflation). Economists from some schools of economic thought (including some Austrian economists) still retain this usage. In contemporary economic terminology, these would usually be referred to as expansionary and contractionary monetary policies. The Politics series Politics Portal This box:      Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ... This article or section does not adequately cite its references or sources. ... The Austrian School is a school of economic thought which rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology. ...

Measures of inflation

Inflation rates are calculated for many different price indices, including: This article does not cite its references or sources. ...

• Consumer price indices (CPIs) which measure the price of a selection of goods purchased by a "typical consumer."
• Cost-of-living indices (COLI) which often adjust fixed incomes and contractual incomes based on measures of goods and services price changes.
• Producer price indices (PPIs) which measure the price received by a producer. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any resulting increase in the CPI. Producer price inflation measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity.
• Wholesale price indices, which measure the price of a selection of goods at wholesale, prior to retail mark ups and sales taxes. These are very similar to the Producer Price Indices.
• Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.
• The GDP Deflator is a measure of the price of all the goods and services included in Gross Domestic Product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.
• Capital goods price Index, although so far no attempt at building such an index has been tried, several economists have recently pointed the necessity to measure separately capital goods inflation (inflation in the price of stocks, real estate, and other assets).^{[citation needed]} Indeed a given increase in the supply of money can lead to a rise in inflation (consumption goods inflation) and or to a rise in capital goods price inflation. The growth in money supply has remained fairly constant through since the 1970's however consumption goods price inflation has been reduced because most of the inflation has happened in the capital goods prices.

Other types of inflation measures include: It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ... A cost-of-living index measures the cost of goods and services, typically over time. ... The Producer Price Index (PPI) measures average changes in prices received by domestic producers for their output. ... The Wholesale Price Index (WPI) was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by the producer price index (PPI) in 1978. ... A Commodity Price Index is a fixed-weight index of the spot or transaction prices of multiple commodities. ... In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. ... This article is about GDP in the context of economics. ... In economics, capital goods refer to real products that are used in the production of other products but are not incorporated into the new product that is derived from the production of the older product. ...

• Regional Inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
• Historical Inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. This is equivalent to not adjusting the composition of baskets over time.

Issues in measuring inflation

Measuring inflation requires finding objective ways of separating out changes in nominal prices from other influences related to real activity. In the simplest possible case, if the price of a 10 oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price change represents inflation. But we are usually more interested in knowing how the overall cost of living changes, and therefore instead of looking at the change in price of one good, we want to know how the price of a large 'basket' of goods and services changes. This is the purpose of looking at a price index, which is a weighted average of many prices. The weights in the Consumer Price Index, for example, represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households). This article does not cite its references or sources. ... It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ...

Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods from the present are compared with goods from the past. This includes hedonic adjustments and “reweighing” as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. Finally, when looking at inflation, economic institutions sometimes only look at subsets or special indices. One common set is inflation ex-food and energy, which is often called “core inflation”. Statistical noise is the colloquial term for recognized amounts of variation in a sample. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... A measure of inflation that excludes certain items which face volatile price movements. ...

Role of inflation in the economy

In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.^[2] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy. Monetarism is a set of views concerning the determination of national income and monetary economics. ...

A great deal of economic literature concerns the question of what causes inflation and what effect it has. A small amount of inflation is generally viewed as having a positive effect on the economy.^{[citation needed]} One reason for this is that it is difficult to renegotiate some prices, and particularly wages, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it. More generally because modest inflation means that the price of given good is likely to increase over time there is an inherent advantage to making purchases sooner than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments. High inflation, though, tends to reduce long-term capital formation by hurting the incentive to save, and to effectively reduce long-term spending by making products less affordable. Deflation, by contrast, leads to an incentive to save more and encourages less short term spending potentially slowing economic growth. “Deflation” redirects here. ... Invest redirects here. ...

Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation.^{[citation needed]} In investing, inflation risks often cause investors to take on more systematic risk, in order to gain returns that will stay ahead of expected inflation. Inflation is also used as an index for cost of living adjustments and as a peg for some bonds. In effect, inflation is the rate at which previous economic transactions are discounted economically. A systemic risk is a risk faced by a system, in contrast to a specific risk or unique risk. ... In finance, discounting is the process of finding the current value of an amount of cash at some future date, and along with compounding cash form the basis of time value of money calculations. ...

Inflation also gives central banks room to maneuver, since their primary tool for controlling the money supply and velocity of money is by setting the lowest interest rate in an economy - the discount rate at which banks can borrow from the central bank. Since borrowing at negative interest is generally ineffective, a positive inflation rate gives central bankers "ammunition", as it is sometimes called, to stimulate the economy. Velocity of money In economics, the velocity of money refers to a key term in the quantity theory of money, which centers on the equation of exchange: M*V = P*Q where M is the total amount of money in circulation in an economy at any one time (say, on...

However, in general, inflation rates above the nominal amounts required to give monetary freedom, and investing incentive, are regarded as negative, particularly because in current economic theory, inflation begets further inflationary expectations.

• Increasing uncertainty may discourage investment and saving.
• Redistribution
  • It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
  • Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.
• International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
• Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.
• Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
• Bracket Creep (also called fiscal drag) is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

As noted, some economists see moderate inflation as a benefit; some business executives see mild inflation as "greasing the wheels of commerce." A very few economists have advocated reducing inflation to zero as a monetary policy goal - particularly in the late 1990s at the end of a long disinflationary period, when the policy seemed within reach. For other uses, see Debt (disambiguation). ... “Taxes” redirects here. ... The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal. ... Certain figures in this article use scientific notation for readability. ... Fiscal drag refers to the increase in tax revenue caused when the threshold of a tax is not increased in line with inflation. ...

Causes

There are different schools of thought as to what causes inflation. Most can be divided into two broad areas: quality theories of inflation, and quantity theories of inflation. Many theories of inflation combine the two. The quality theory of inflation rests on the expectation of a buyer accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the equation of the money supply, its velocity, and exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production. For other persons named Adam Smith, see Adam Smith (disambiguation). ... This article is about the philosopher. ...

Keynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices. Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ...

There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":

• Demand-pull inflation: inflation caused by increases in aggregate demand due to increased private and government spending, etc.
• Cost-push inflation: presently termed "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Take for instance a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.
• Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up (gross wages have to increase above the CPI rate to net to CPI after-tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation.

A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the demand for money, as happened in Europe during the Black Plague. Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply. ... Cost-push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. ... Built-in inflation is a concept from economics referring to a type of inflation that resulted from past events and persists in the present. ... In economics, adaptive expectations means that people base their expectations of what will happen in the future based on what has happened in the past. ... In macroeconomics, the price/wage spiral (also called the wage/price spiral) represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. ... Built-in inflation is an economic concept referring to a type of inflation that resulted from past events and persists in the present. ... For other uses, see Money (disambiguation). ... In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ... Certain figures in this article use scientific notation for readability. ...

The money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economics, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand. Some economists consider this a 'hocus pocus' approach: They disagree with the notion that central banks control the money supply, arguing that central banks have little control because the money supply adapts to the demand for bank credit issued by commercial banks. This is the theory of endogenous money. Advocated strongly by post-Keynesians as far back as the 1960s, it has today become a central focus of Taylor rule advocates. But this position is not universally accepted. Banks create money by making loans. But the aggregate volume of these loans diminishes as real interest rates increase. Thus, it is quite likely that central banks influence the money supply by making money cheaper or more expensive, and thus increasing or decreasing its production. In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ... Keynesian economics (pronounced kainzian, IPA ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... The Taylor rule is a modern monetary rule proposed by economist John B. Taylor that would stipulate exactly how much the Federal Reserve should change the interest rates in response to real divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate...

A fundamental concept in Keynesian analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Philips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s. CIA figures for world unemployment rates, 2006 Unemployment is the state in which a worker wants, but is unable, to work. ... Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... A Tradeoff usually refers to losing one quality or aspect of something in return for gaining another quality or aspect. ... This article uses excessive clichés and jargon. ...

Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) because of such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model. In macroeconomics, the price/wage spiral (also called the wage/price spiral) represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. ... Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply. ...

Another Keynesian concept is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation. In economics, potential output (also referred to as natural real gross domestic product) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. ... Natural gross domestic product (natural GDP) is defined as the optimal production capacity of a territorys economy given natural and institutional constraints. ... The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. ...

However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change because of policy: for example, high unemployment under British Prime Minister Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation. Margaret Hilda Thatcher, Baroness Thatcher, LG, OM, PC, FRS (née Roberts; born 13 October 1925) served as British Prime Minister from 1979 to 1990 and leader of the Conservative Party from 1975 until 1990, being the first and only woman to hold either post. ... Structural unemployment involves a mismatch between workers looking for jobs and the vacancies available often despite the number of vacancies being similar to the number of unemployed people. ... CIA figures for world unemployment rates, 2006 Unemployment is the state in which a worker wants, but is unable, to work. ...

Problems

High inflation can cause three main problems:

1. It hurts people on fixed incomes (e.g. pensioners, students) by reducing their purchasing power. This has a significant effect on GDP.^{[citation needed]}
2. Rising inflation can prompt trade unions to demand higher wages, under the circular logic that wages must keep up with inflation. (Of course, rising wages can help fuel inflation.) In the case of collective bargaining, wages will be set as a factor of price expectations (Pe). Pe will be higher when inflation has an upward trend. This can cause a wage spiral. Also, if strikes occur in an important industry which has a comparative advantage, productivity could decline.^{[citation needed]}
3. If inflation is higher in one country than in its trading partners', and that country maintains fixed exchange rates, then the country's exports will become more expensive abroad and it will tend toward a current-account deficit.^{[citation needed]}

In macroeconomics, the price/wage spiral (also called the wage/price spiral) represents a vicious circle process in which different sides of the wage bargain try to keep up with inflation to protect real incomes. ...

Monetarism

Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The Quantity Theory of Money, simply stated, says that the total amount of spending in an economy is primarily determined by the total amount of money in existence. From this theory the following formula is created:

where P is the general price level of consumer goods, D_C is the aggregate demand for consumer goods and S_C is the aggregate supply of consumer goods. The idea is that the general price level of consumer goods will rise only if the aggregate supply of consumer goods falls relative to aggregate demand for consumer goods, or if aggregate demand increases relative to aggregate supply. Based on the idea that total spending is based primarily on the total amount of money in existence, the economists calculate aggregate demand for consumers' goods based on the total quantity of money. Therefore, they posit that as the quantity of money increases, total spending increases and aggregate demand for consumer goods increases too. For this reason, economists who believe in the Quantity Theory of Money also believe that the only cause of rising prices in a growing economy (this means the aggregate supply of consumer goods is increasing) is an increase of the quantity of money in existence, which is a function of monetary policies, generally set by central banks that have a monopoly on the issuance of currency, which is not pegged to a commodity, such as gold. The central bank of the United States is the Federal Reserve; the central bank backing the euro is the European Central Bank. The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... For other uses, see Euro (disambiguation). ... Headquarters Coordinates , , Established 1 January 1998 President Jean-Claude Trichet Central Bank of Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain Currency Euro ISO 4217 Code EUR Reserves €43bn directly, €338bn through the Eurosystem (including gold deposits). ...

No one denies that inflation is associated with excessive money supply, but opinions differ as to whether excessive money supply is the cause.

Rational expectations

Rational expectations theory holds that economic actors look rationally into the future when trying to maximize their well-being, and do not respond solely to immediate opportunity costs and pressures. In this view, while generally grounded in monetarism, future expectations and strategies are important for inflation as well.

A core assertion of rational expectations theory is that actors will seek to “head off” central-bank decisions by acting in ways that fulfill predictions of higher inflation. This means that central banks must establish their credibility in fighting inflation, or have economic actors make bets that the economy will expand, believing that the central bank will expand the money supply rather than allow a recession.

Other theories

Austrian School

Austrian School economics falls within the general tradition of the quantity theory of money, but is notable for providing a theory of the process whereby, upon an increase of the money supply, a new equilibrium is pursued. More specifically, possessors of the additional money are held to react to their new purchasing power by changing their buying habits in a way that generally increases demand for goods and for services. Austrian School economists do not believe that production will simply rise to meet all this new demand, so that prices increase and the new purchasing power erodes. The Austrian School emphasizes that this process is not instantaneous, and that the changes in demand are not distributed uniformly, so that the process does not ultimately lead to an equilibrium identical to the old except for some proportionate increase in prices; that “nominal” values thus have real effects. Austrian economists tend to view fiat increases in the money supply as particularly pernicious in their real effects. This view typically leads to the support for a commodity standard of a very strict variety where all notes are convertible on demand to some commodity or basket of commodities. (The more popular of the Austrian economists tend to favor a gold standard.) The Austrian School, also known as the “Vienna School” or the “Psychological School”, is a heterodox school of economic thought that advocates adherence to strict methodological individualism. ... This article does not cite any references or sources. ... For other uses, see Gold standard (disambiguation). ...

Marxist theory

In Marxist economics value is based on the labor required to extract a given commodity versus the demand for that commodity by those with money. The fluctuations of price in money terms are inconsequential compared to the rise and fall of the labor cost of a commodity, since this determines the true cost of a good or service. In this, Marxist economics is related to other "classical" economic theories that argue that monetary inflation is caused solely by printing notes in excess of the basic quantity of gold. However, Marx argues that the real kind of inflation is in the cost of production measured in labor. Because of the classical labor theory of value, the only factor that is important is whether more or less labor is required to produce a given commodity at the rate it is demanded. Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ...

Supply-side economics

Supply-side economics asserts that inflation is caused by either an increase in the supply of money or a decrease in the demand for balances of money. Thus the inflation experienced during the Black Plague in medieval Europe is seen as being caused by a decrease in the demand for money, the money stock used was gold coin and it was relatively fixed, while inflation in the 1970s is regarded as initially caused by an increased supply of money that occurred following the U.S. exit from the Bretton Woods gold standard. Supply-side economics asserts that the money supply can grow without causing inflation as long as the demand for balances of money also grows.^{[citation needed]} Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... This article concerns the epidemic of the mid-14th century. ... Wikipedia does not have an article with this exact name. ... For other uses, see Gold standard (disambiguation). ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ...

Issues of classical political economy

While economic theory before the "marginal revolution" is no longer the basis for current economic theory, many of the institutions, concepts, and terms used in economics come from the "classical" period of political economy, including monetary policy, quantity and quality theories of economics, central banking, velocity of money, price levels and division of the economy into production and consumption. For this reason debates about present economics often reference problems of classical political economy, particularly the classical gold standard of 1871-1913, and the currency versus banking debates of that period.

Currency and Banking Schools

Within the context of a fixed specie basis for money, one important controversy was between the "Quantity Theory" of money and the Real Bills Doctrine, or RBD. Within this context, quantity theory applies to the level of fractional reserve accounting allowed against specie, generally gold, held by a bank. The RBD argues that banks should also be able to issue currency against bills of trading, which is "real bills" that they buy from merchants. This theory was important in the 19th century in debates between "Banking" and "Currency" schools of monetary soundness, and in the formation of the Federal Reserve. In the wake of the collapse of the international gold standard post 1913, and the move towards deficit financing of government, RBD has remained a minor topic, primarily of interest in limited contexts, such as currency boards. It is generally held in ill repute today, with Frederic Mishkin going so far as to say it had been "completely discredited." Even so, it has theoretical support from a few economists, particularly those that see restrictions on a particular class of credit as incompatible with libertarian principles of laissez-faire, even though almost all libertarian economists are opposed to the RBD. For other uses, see Bank (disambiguation). ... The Real Bills doctrine holds that monetizing highly liquid debt or self-liquidating commercial paper is non-inflationary. ... The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... // A currency board is a monetary authority which is required to maintain an exchange rate with a foreign currency. ... Frederic S. Mishkin (January 11, 1951) is an economist and currently the Alfred Lerner Professor of Banking and Financial Institutions at the Graduate School of Business, Columbia University. ... See also Libertarianism and Libertarian Party Libertarian,is a term for person who has made a conscious and principled commitment, evidenced by a statement or Pledge, to forswear violating others rights and usually living in voluntary communities: thus in law no longer subject to government supervision. ...

The debate between currency, or quantity theory, and banking schools in Britain during the 19th century prefigures current questions about the credibility of money in the present. In the 19th century the banking school had greater influence in policy in the United States and Great Britain, while the currency school had more influence "on the continent", that is in non-British countries, particularly in the Latin Monetary Union and the earlier Scandinavia monetary union.

Anti-classical or backing theory

Another issue associated with classical political economy is the anti-classical hypothesis of money, or "backing theory". The backing theory [1] argues that the value of money is determined by the assets and liabilities of the issuing agency. Unlike the Quantity Theory of classical political economy, the backing theory argues that issuing authorities can issue money without causing inflation so long as the money issuer has sufficient assets to cover redemptions.

Controlling inflation

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... A symmetrical inflation target is a requirement on a central bank to pay just as much attention to a situation where inflation is too low as when inflation is too high. ...

Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... For other uses, see Gold standard (disambiguation). ... Open Market Operations are the means by which central banks control the liquidity of the national currency. ...

Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. Many developed nations set prices extensively, including for basic commodities as gasoline. The usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices. In economics, incomes policies are wage and price controls used to fight inflation. ... Year 1972 (MCMLXXII) was a leap year starting on Saturday (link will display full calendar) of the Gregorian calendar. ... Nixon redirects here. ...

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed. See Creative destruction. CIA figures for world unemployment rates, 2006 Unemployment is the state in which a worker wants, but is unable, to work. ... Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. ...

See also

Classification of Individual Consumption by Purpose (COICOP) is a Reference Classification published by the United Nations Statistics Division that divides the purpose of individual consumption expenditures incurred by three institutional sectors, namely households, non-profit institutions serving households and general government. ... “Deflation” redirects here. ... Disinflation is a decrease in the rate of inflation. ... Devaluation is a reduction in the value of a currency with respect to other monetary units. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... Certain figures in this article use scientific notation for readability. ... Circulation in macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national economy as a whole. ... Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... Used generally to describe a series of economic events from the second half of the 15th century to the first half of the 17th, the price revolution refers most specifically to the high rate of inflation that characterized the period across Western Europe, with prices on average rising perhaps sixfold... In finance, the rule of 72, the rule of 71, the rule of 70 and the rule of 69. ... Seigniorage, also spelled seignorage, is the net revenue derived from the issuing of currency. ... This article uses excessive clichés and jargon. ... UNSD is an acronym that stands for United Nations Statistics Division External links http://unstats. ... Inflation accounting is a financial reporting process that considers the effects of inflation on financial statements. ...

Further reading

• George Reisman, Capitalism: A Treatise on Economics (Ottawa : Jameson Books, 1990), 503-506 & Chapter 19 ISBN 0-915463-73-3
• Mishkin, Frederic S., The Economics of Money, Banking, and Financial Markets, New York, Harper Collins, 1995.
• Baumol, William J. and Alan S. Blinder, Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western, 2006. ISBN 0-324-22114-2

References

External links

• Economic Horizon's WorldInflation.net, inflating the world one economy at a time

Statistical sources

• United States Bureau of Labor Statistics Consumer Price Index homepage
• Current Value of Old Money - discusses changes in the value of money over time.
• Various inflation calculators - US Dollars (1790-2005), UK pounds (1830-2005), price of gold (1257-2005)
• US Inflation calculator - Based on consumer price indices (1800-2006)
• Cost-of-Living Calculator from American Institute for Economic Research (AIER)

Magazine

• Relationship between inflation and unemployment in Dollars & Sense magazine