Inflation

This article is about a rise in the general price level. Forthe expansion of the early universe, see Inflation (cos-mology). For other uses, see Inflation (disambiguation).

In economics, inflation is a sustained increase in thegeneral price level of goods and services in an economyover a period of time.[1] When the general price levelrises, each unit of currency buys fewer goods and ser-vices. Consequently, inflation reflects a reduction in thepurchasing power per unit of money – a loss of real valuein the medium of exchange and unit of account withinthe economy.[2][3] A chief measure of price inflation isthe inflation rate, the annualized percentage change in ageneral price index (normally the consumer price index)over time.[4] The opposite of inflation is deflation.Inflation affects an economy in various ways, both pos-itive and negative. Negative effects of inflation includean increase in the opportunity cost of holding money,uncertainty over future inflation which may discour-age investment and savings, and if inflation were rapidenough, shortages of goods as consumers begin hoardingout of concern that prices will increase in the future. Pos-itive effects include ensuring that central banks can adjustreal interest rates (to mitigate recessions),[5] and encour-aging investment in non-monetary capital projects.Economists generally believe that high rates of inflationand hyperinflation are caused by an excessive growth ofthe money supply.[6] However, money supply growth doesnot necessarily cause inflation. Some economists main-tain that under the conditions of a liquidity trap, largemonetary injections are like “pushing on a string”.[7][8]Views on which factors determine low to moderate ratesof inflation are more varied. Low or moderate infla-tion may be attributed to fluctuations in real demandfor goods and services, or changes in available suppliessuch as during scarcities.[9] However, the consensus viewis that a long sustained period of inflation is caused bymoney supply growing faster than the rate of economicgrowth.[10][11]

Today, most economists favor a low and steady rate ofinflation.[12] Low (as opposed to zero or negative) infla-tion reduces the severity of economic recessions by en-abling the labor market to adjust more quickly in a down-turn, and reduces the risk that a liquidity trap preventsmonetary policy from stabilizing the economy.[13] Thetask of keeping the rate of inflation low and stable is usu-ally given to monetary authorities. Generally, these mon-etary authorities are the central banks that control mon-

etary policy through the setting of interest rates, throughopen market operations, and through the setting of bank-ing reserve requirements.[14]

1 History

U.S. Historical Inflation Rate

Ann

ual I

nfla

tion

Rat

e

40%

30%

20%

10%

0%

-10%

-20%

1650 1700 1750 1800 1850 1900 1950 2000

Annual inflation rates in the United States from 1666 to 2004.

Inflation rate (%)

Below 0 (Deflation)0 - 22 - 44 - 77 - 1010 - 1515 - 3030 - 45No data Data Year: 2013

Inflation rates around the world in 2013, per International Mon-etary Fund.

Increases in quantity of the money or in the overall moneysupply (or debasement of the means of exchange) haveoccurred in many different societies throughout history,changing with different forms of money used.[15][16] Forinstance, when gold was used as currency, the govern-ment could collect gold coins, melt them down, mix themwith other metals such as silver, copper or lead, and reis-sue them at the same nominal value. By diluting the goldwith other metals, the government could issue more coinswithout also needing to increase the amount of gold usedto make them. When the cost of each coin is loweredin this way, the government profits from an increase inseigniorage.[17] This practice would increase the moneysupply but at the same time the relative value of each coinwould be lowered. As the relative value of the coins be-comes lower, consumers would need to give more coinsin exchange for the same goods and services as before.

1

2 2 RELATED DEFINITIONS

These goods and services would experience a price in-crease as the value of each coin is reduced.[18]

Song Dynasty China introduced the practice of printingpaper money in order to create fiat currency.[19] Duringthe Mongol Yuan Dynasty, the government spent a greatdeal of money fighting costly wars, and reacted by print-ing more, leading to inflation.[20] The problem of infla-tion became so severe that the people stopped using papermoney, which they saw as “worthless paper.”[21] Fearingthe inflation that plagued the Yuan dynasty, the Ming Dy-nasty initially rejected the use of paper money, using onlycopper coins. The dynasty did not issue paper currencyuntil 1375.[21]

Historically, infusions of gold or silver into an economyalso led to inflation. From the second half of the 15thcentury to the first half of the 17th,Western Europe expe-rienced a major inflationary cycle referred to as the "pricerevolution",[22][23] with prices on average rising perhapssixfold over 150 years. This was largely caused by thesudden influx of gold and silver from the New Worldinto Habsburg Spain.[24] The silver spread throughout apreviously cash-starved Europe and caused widespreadinflation.[25][26] Demographic factors also contributed toupward pressure on prices, with European populationgrowth after depopulation caused by the Black Deathpandemic.By the nineteenth century, economists categorized threeseparate factors that cause a rise or fall in the price ofgoods: a change in the value or production costs of thegood, a change in the price of money which then was usu-ally a fluctuation in the commodity price of the metal-lic content in the currency, and currency depreciation re-sulting from an increased supply of currency relative tothe quantity of redeemable metal backing the currency.Following the proliferation of private banknote currencyprinted during the American Civil War, the term “infla-tion” started to appear as a direct reference to the cur-rency depreciation that occurred as the quantity of re-deemable banknotes outstripped the quantity of metalavailable for their redemption. At that time, the term in-flation referred to the devaluation of the currency, and notto a rise in the price of goods.[27]

This relationship between the over-supply of banknotesand a resulting depreciation in their value was noted byearlier classical economists such as David Hume andDavid Ricardo, who would go on to examine and debatewhat effect a currency devaluation (later termedmonetaryinflation) has on the price of goods (later termed price in-flation, and eventually just inflation).[28]

The adoption of fiat currency bymany countries, from the18th century onwards, made much larger variations in thesupply of money possible. Since then, huge increases inthe supply of paper money have taken place in a numberof countries, producing hyperinflations – episodes of ex-treme inflation rates much higher than those observed inearlier periods of commodity money. The hyperinflation

in the Weimar Republic of Germany is a notable exam-ple.

2 Related definitions

The term “inflation” originally referred to increases in theamount of money in circulation,[29] and some economistsstill use the word in this way. However, most economiststoday use the term “inflation” to refer to a rise in the pricelevel. An increase in the money supply may be calledmonetary inflation, to distinguish it from rising prices,which may also for clarity be called “price inflation”.[30]Economists generally agree that in the long run, inflationis caused by increases in the money supply.[31]

It is important to distinguish the word “inflation” concep-tually, since it refers only to the general trend, not specificone. For example, if people buy much more cucumbersthan tomatoes, which consequently become cheaper, itdoes not correspond to the inflation - it is a simple shift oftastes. It was easier to observe when currency was linkedwith the gold price. If new gold deposits were found, theprices on gold would become lower and prices - higher.And vice versa.[32]

Other economic concepts related to inflation include:deflation – a fall in the general price level; disinflation – adecrease in the rate of inflation; hyperinflation – an out-of-control inflationary spiral; stagflation – a combinationof inflation, slow economic growth and high unemploy-ment; and reflation – an attempt to raise the general levelof prices to counteract deflationary pressures.Since there are many possible measures of the price level,there are many possible measures of price inflation. Mostfrequently, the term “inflation” refers to a rise in a broadprice index representing the overall price level for goodsand services in the economy. The Consumer Price In-dex (CPI), the Personal Consumption Expenditures PriceIndex (PCEPI) and the GDP deflator are some exam-ples of broad price indices. However, “inflation” mayalso be used to describe a rising price level within a nar-rower set of assets, goods or services within the econ-omy, such as commodities (including food, fuel, met-als), tangible assets (such as real estate), financial assets(such as stocks, bonds), services (such as entertainmentand health care), or labor. Although the values of capi-tal assets are often casually said to “inflate,” this shouldnot be confused with inflation as a defined term; a moreaccurate description for an increase in the value of a cap-ital asset is appreciation. The Reuters-CRB Index (CCI),the Producer Price Index, and Employment Cost Index(ECI) are examples of narrow price indices used to mea-sure price inflation in particular sectors of the economy.Core inflation is a measure of inflation for a subset of con-sumer prices that excludes food and energy prices, whichrise and fall more than other prices in the short term. TheFederal Reserve Board pays particular attention to the

3

core inflation rate to get a better estimate of long-termfuture inflation trends overall.[33]

3 Measures

See also: Consumer price indexThe inflation rate is widely calculated by calculating

CPI inflation (year-on-year) in the United States from 1914 to2010.

the movement or change in a price index, usually theconsumer price index.[34] The inflation rate is the percent-age rate of change of a price index over time. The RetailPrices Index is also a measure of inflation that is com-monly used in the United Kingdom. It is broader than theCPI and contains a larger basket of goods and services.To illustrate the method of calculation, in January 2007,the U.S. Consumer Price Index was 202.416, and in Jan-uary 2008 it was 211.080. The formula for calculating theannual percentage rate inflation in the CPI over the courseof the year is:

(211.080−202.416

202.416

)× 100% = 4.28% The

resulting inflation rate for the CPI in this one year periodis 4.28%, meaning the general level of prices for typi-cal U.S. consumers rose by approximately four percentin 2007.[35]

Other widely used price indices for calculating price in-flation include the following:

• Producer price indices (PPIs) which measures av-erage changes in prices received by domestic pro-ducers for their output. This differs from the CPIin that price subsidization, profits, and taxes maycause the amount received by the producer to differfrom what the consumer paid. There is also typi-cally a delay between an increase in the PPI and anyeventual increase in the CPI. Producer price indexmeasures the pressure being put on producers by thecosts of their raw materials. This could be “passedon” to consumers, or it could be absorbed by prof-its, or offset by increasing productivity. In India andthe United States, an earlier version of the PPI wascalled the Wholesale Price Index.

• Commodity price indices, whichmeasure the priceof a selection of commodities. In the present com-modity price indices are weighted by the relative im-portance of the components to the “all in” cost of anemployee.

• Core price indices: because food and oil prices canchange quickly due to changes in supply and demandconditions in the food and oil markets, it can be dif-ficult to detect the long run trend in price levels whenthose prices are included. Therefore most statisticalagencies also report a measure of 'core inflation',which removes the most volatile components (suchas food and oil) from a broad price index like theCPI. Because core inflation is less affected by shortrun supply and demand conditions in specific mar-kets, central banks rely on it to better measure theinflationary impact of current monetary policy.

Other common measures of inflation are:

• GDP deflator is a measure of the price of all thegoods and services included in gross domestic prod-uct (GDP). The US Commerce Department pub-lishes a deflator series for US GDP, defined as itsnominal GDPmeasure divided by its real GDPmea-sure.

∴ GDPDeflator = NominalGDPRealGDP

• Regional inflation The Bureau of Labor Statisticsbreaks down CPI-U calculations down to differentregions of the US.

• Historical inflation Before collecting consistenteconometric data became standard for governments,and for the purpose of comparing absolute, ratherthan relative standards of living, various economistshave calculated imputed inflation figures. Most in-flation data before the early 20th century is imputedbased on the known costs of goods, rather than com-piled at the time. It is also used to adjust for the dif-ferences in real standard of living for the presenceof technology.

• Asset price inflation is an undue increase in theprices of real or financial assets, such as stock (eq-uity) and real estate. While there is no widely ac-cepted index of this type, some central bankers havesuggested that it would be better to aim at stabilizinga wider general price level inflation measure that in-cludes some asset prices, instead of stabilizing CPIor core inflation only. The reason is that by raisinginterest rates when stock prices or real estate pricesrise, and lowering them when these asset prices fall,central banks might be more successful in avoidingbubbles and crashes in asset prices.

4 4 EFFECTS

3.1 Issues in measuring

Measuring inflation in an economy requires objectivemeans of differentiating changes in nominal prices ona common set of goods and services, and distinguishingthem from those price shifts resulting from changes invalue such as volume, quality, or performance. For ex-ample, 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 changein quality, then this price difference represents inflation.This single price change would not, however, representgeneral inflation in an overall economy. Tomeasure over-all inflation, the price change of a large “basket” of rep-resentative goods and services is measured. This is thepurpose of a price index, which is the combined price ofa “basket” of many goods and services. The combinedprice is the sum of the weighted prices of items in the“basket”. A weighted price is calculated by multiplyingthe unit price of an item by the number of that item theaverage consumer purchases. Weighted pricing is a nec-essary means to measuring the impact of individual unitprice changes on the economy’s overall inflation. TheConsumer Price Index, for example, uses data collectedby surveying households to determine what proportion ofthe typical consumer’s overall spending is spent on spe-cific goods and services, and weights the average prices ofthose items accordingly. Those weighted average pricesare combined to calculate the overall price. To better re-late price changes over time, indexes typically choose a“base year” price and assign it a value of 100. Index pricesin subsequent years are then expressed in relation to thebase year price.[14] While comparing inflation measuresfor various periods one has to take into consideration thebase effect as well.Inflation measures are often modified over time, either forthe relative weight of goods in the basket, or in the way inwhich goods and services from the present are comparedwith goods and services from the past. Over time, ad-justments are made to the type of goods and services se-lected in order to reflect changes in the sorts of goods andservices purchased by 'typical consumers’. New productsmay be introduced, older products disappear, the qual-ity of existing products may change, and consumer pref-erences can shift. Both the sorts of goods and serviceswhich are included in the “basket” and the weighted priceused in inflation measures will be changed over time inorder to keep pace with the changing marketplace.Inflation numbers are often seasonally adjusted in orderto differentiate expected cyclical cost shifts. For example,home heating costs are expected to rise in colder months,and seasonal adjustments are often used when measuringfor inflation to compensate for cyclical spikes in energyor fuel demand. Inflation numbers may be averaged orotherwise subjected to statistical techniques in order toremove statistical noise and volatility of individual prices.When looking at inflation, economic institutions may fo-cus only on certain kinds of prices, or special indices, such

as the core inflation index which is used by central banksto formulate monetary policy.Most inflation indices are calculated from weighted av-erages of selected price changes. This necessarily intro-duces distortion, and can lead to legitimate disputes aboutwhat the true inflation rate is. This problem can be over-come by including all available price changes in the cal-culation, and then choosing the median value.[36] In someother cases, governments may intentionally report falseinflation rates; for instance, the government of Argentinahas been criticised for manipulating economic data, suchas inflation and GDP figures, for political gain and to re-duce payments on its inflation-indexed debt.[37][38]

4 Effects

4.1 General

An increase in the general level of prices implies a de-crease in the purchasing power of the currency. Thatis, when the general level of prices rise, each monetaryunit buys fewer goods and services. The effect of infla-tion is not distributed evenly in the economy, and as aconsequence there are hidden costs to some and benefitsto others from this decrease in the purchasing power ofmoney. For example, with inflation, those segments in so-ciety which own physical assets, such as property, stocketc., benefit from the price/value of their holdings goingup, when those who seek to acquire them will need topay more for them. Their ability to do so will depend onthe degree to which their income is fixed. For example,increases in payments to workers and pensioners oftenlag behind inflation, and for some people income is fixed.Also, individuals or institutions with cash assets will ex-perience a decline in the purchasing power of the cash.Increases in the price level (inflation) erode the real valueof money (the functional currency) and other items withan underlying monetary nature.Debtors who have debts with a fixed nominal rate of in-terest will see a reduction in the “real” interest rate asthe inflation rate rises. The real interest on a loan is thenominal rate minus the inflation rate. The formula R =N-I approximates the correct answer as long as both thenominal interest rate and the inflation rate are small. Thecorrect equation is r = n/i where r, n and i are expressedas ratios (e.g. 1.2 for +20%, 0.8 for −20%). As an ex-ample, when the inflation rate is 3%, a loan with a nom-inal interest rate of 5% would have a real interest rate ofapproximately 2% (in fact, it’s 1.94%). Any unexpectedincrease in the inflation rate would decrease the real inter-est rate. Banks and other lenders adjust for this inflationrisk either by including an inflation risk premium to fixedinterest rate loans, or lending at an adjustable rate.

4.3 Positive 5

4.2 Negative

High or unpredictable inflation rates are regarded asharmful to an overall economy. They add inefficienciesin the market, and make it difficult for companies to bud-get or plan long-term. Inflation can act as a drag on pro-ductivity as companies are forced to shift resources awayfrom products and services in order to focus on profitand losses from currency inflation.[14] Uncertainty aboutthe future purchasing power of money discourages invest-ment and saving.[39] Inflation can also impose hidden taxincreases. For instance, inflated earnings push taxpayersinto higher income tax rates unless the tax brackets areindexed to inflation.With high inflation, purchasing power is redistributedfrom those on fixed nominal incomes, such as some pen-sioners whose pensions are not indexed to the price level,towards those with variable incomes whose earnings maybetter keep pace with the inflation.[14] This redistribu-tion of purchasing power will also occur between inter-national trading partners. Where fixed exchange rates areimposed, higher inflation in one economy than anotherwill cause the first economy’s exports to become moreexpensive and affect the balance of trade. There can alsobe negative impacts to trade from an increased instabil-ity in currency exchange prices caused by unpredictableinflation.

Cost-push inflation High inflation can prompt employ-ees to demand rapid wage increases, to keep up withconsumer prices. In the cost-push theory of infla-tion, rising wages in turn can help fuel inflation.In the case of collective bargaining, wage growthwill be set as a function of inflationary expectations,which will be higher when inflation is high. This cancause a wage spiral.[40] In a sense, inflation begetsfurther inflationary expectations, which beget fur-ther inflation.

Hoarding People buy durable and/or non-perishablecommodities and other goods as stores of wealth,to avoid the losses expected from the declining pur-chasing power of money, creating shortages of thehoarded goods.

Social unrest and revolts Inflation can lead to massivedemonstrations and revolutions. For example, in-flation and in particular food inflation is consideredas one of the main reasons that caused the 2010–2011 Tunisian revolution[41] and the 2011 Egyp-tian revolution,[42] according to many observers in-cluding Robert Zoellick,[43] president of the WorldBank. Tunisian president Zine El Abidine Ben Aliwas ousted, Egyptian President Hosni Mubarak wasalso ousted after only 18 days of demonstrations,and protests soon spread in many countries of NorthAfrica and Middle East.

Hyperinflation If inflation becomes too high, it cancause people to severely curtail their use of the cur-rency, leading to an acceleration in the inflation rate.High and accelerating inflation grossly interfereswith the normal workings of the economy, hurtingits ability to supply goods. Hyperinflation can leadto the abandonment of the use of the country’s cur-rency (for example as in North Korea) leading to theadoption of an external currency (dollarization).[44]

Allocative efficiency A change in the supply or demandfor a good will normally cause its relative price tochange, signaling the buyers and sellers that theyshould re-allocate resources in response to the newmarket conditions. But when prices are constantlychanging due to inflation, price changes due to gen-uine relative price signals are difficult to distinguishfrom price changes due to general inflation, so agentsare slow to respond to them. The result is a loss ofallocative efficiency.

Shoe leather cost High inflation increases the opportu-nity cost of holding cash balances and can inducepeople to hold a greater portion of their assets in in-terest paying accounts. However, since cash is stillneeded in order to carry out transactions this meansthat more “trips to the bank” are necessary in orderto make withdrawals, proverbially wearing out the“shoe leather” with each trip.

Menu costs With high inflation, firms must change theirprices often in order to keep up with economy-widechanges. But often changing prices is itself a costlyactivity whether explicitly, as with the need to printnew menus, or implicitly, as with the extra time andeffort needed to change prices constantly.

Business cycles According to the Austrian Business Cy-cle Theory, inflation sets off the business cycle. Aus-trian economists hold this to be the most damagingeffect of inflation. According to Austrian theory,artificially low interest rates and the associated in-crease in the money supply lead to reckless, specu-lative borrowing, resulting in clusters of malinvest-ments, which eventually have to be liquidated as theybecome unsustainable.[45]

4.3 Positive

Labour-market adjustments Nominal wages are slowto adjust downwards. This can lead to prolongeddisequilibrium and high unemployment in the labormarket. Since inflation allows real wages to fall evenif nominal wages are kept constant, moderate in-flation enables labor markets to reach equilibriumfaster.[46]

6 5 CAUSES

Room to maneuver The primary tools for controllingthe money supply are the ability to set the discountrate, the rate at which banks can borrow from thecentral bank, and open market operations, which arethe central bank’s interventions into the bonds mar-ket with the aim of affecting the nominal interestrate. If an economy finds itself in a recession with al-ready low, or even zero, nominal interest rates, thenthe bank cannot cut these rates further (since nega-tive nominal interest rates are impossible) in orderto stimulate the economy – this situation is known asa liquidity trap. A moderate level of inflation tendsto ensure that nominal interest rates stay sufficientlyabove zero so that if the need arises the bank can cutthe nominal interest rate.

Mundell–Tobin effect The Nobel laureate RobertMundell noted that moderate inflation would inducesavers to substitute lending for some money holdingas a means to finance future spending. That sub-stitution would cause market clearing real interestrates to fall.[47] The lower real rate of interest wouldinduce more borrowing to finance investment. In asimilar vein, Nobel laureate James Tobin noted thatsuch inflation would cause businesses to substituteinvestment in physical capital (plant, equipment,and inventories) for money balances in their assetportfolios. That substitution would mean choosingthe making of investments with lower rates of realreturn. (The rates of return are lower because theinvestments with higher rates of return were alreadybeing made before.)[48] The two related effectsare known as the Mundell–Tobin effect. Unlessthe economy is already overinvesting accordingto models of economic growth theory, that extrainvestment resulting from the effect would be seenas positive.

Instability with deflation Economist S.C. Tsaing notedthat once substantial deflation is expected, two im-portant effects will appear; both a result of moneyholding substituting for lending as a vehicle forsaving.[49] The first was that continually fallingprices and the resulting incentive to hoard moneywill cause instability resulting from the likely in-creasing fear, while money hoards grow in value,that the value of those hoards are at risk, as peo-ple realize that a movement to trade those moneyhoards for real goods and assets will quickly drivethose prices up. Any movement to spend thosehoards “once started would become a tremendousavalanche, which could rampage for a long time be-fore it would spend itself.”[50] Thus, a regime oflong-term deflation is likely to be interrupted by pe-riodic spikes of rapid inflation and consequent realeconomic disruptions. Moderate and stable inflationwould avoid such a seesawing of price movements.

Financial market inefficiency with deflation The sec-

ond effect noted by Tsaing is that when savers havesubstituted money holding for lending on financialmarkets, the role of those markets in channeling sav-ings into investment is undermined. With nominalinterest rates driven to zero, or near zero, from thecompetition with a high return money asset, therewould be no price mechanism in whatever is left ofthose markets. With financial markets effectivelyeuthanized, the remaining goods and physical assetprices would move in perverse directions. For ex-ample, an increased desire to save could not pushinterest rates further down (and thereby stimulate in-vestment) but would instead cause additional moneyhoarding, driving consumer prices further down andmaking investment in consumer goods productionthereby less attractive. Moderate inflation, onceits expectation is incorporated into nominal inter-est rates, would give those interest rates room to goboth up and down in response to shifting investmentopportunities, or savers’ preferences, and thus allowfinancial markets to function in a more normal fash-ion.

5 Causes

Historically, a great deal of economic literature was con-cerned with the question of what causes inflation and whateffect it has. There were different schools of thought asto the causes of inflation. Most can be divided into twobroad areas: quality theories of inflation and quantity the-ories of inflation. The quality theory of inflation rests onthe expectation of a seller accepting currency to be ableto exchange that currency at a later time for goods that aredesirable as a buyer. The quantity theory of inflation restson the quantity equation of money that relates the moneysupply, its velocity, and the nominal value of exchanges.Adam Smith and David Hume proposed a quantity theoryof inflation for money, and a quality theory of inflation forproduction.Currently, the quantity theory of money is widely ac-cepted as an accurate model of inflation in the longrun. Consequently, there is now broad agreement amongeconomists that in the long run, the inflation rate is es-sentially dependent on the growth rate of money sup-ply relative to the growth of the economy. However, inthe short and medium term inflation may be affected bysupply and demand pressures in the economy, and influ-enced by the relative elasticity of wages, prices and inter-est rates.[51] The question of whether the short-term ef-fects last long enough to be important is the central topicof debate between monetarist and Keynesian economists.In monetarism prices and wages adjust quickly enough tomake other factors merely marginal behavior on a generaltrend-line. In the Keynesian view, prices and wages ad-just at different rates, and these differences have enougheffects on real output to be “long term” in the view of

5.1 Keynesian view 7

people in an economy.

5.1 Keynesian view

Keynesian economics proposes that changes in moneysupply do not directly affect prices, and that visible infla-tion is the result of pressures in the economy expressingthemselves in prices.There are three major types of inflation, as part of whatRobert J. Gordon calls the "triangle model":[52]

• Demand-pull inflation is caused by increases in ag-gregate demand due to increased private and gov-ernment spending, etc. Demand inflation encour-ages economic growth since the excess demand andfavourable market conditions will stimulate invest-ment and expansion.

• Cost-push inflation, also called “supply shock infla-tion,” is caused by a drop in aggregate supply (poten-tial output). This may be due to natural disasters, orincreased prices of inputs. For example, a suddendecrease in the supply of oil, leading to increasedoil prices, can cause cost-push inflation. Produc-ers for whom oil is a part of their costs could thenpass this on to consumers in the form of increasedprices. Another example stems from unexpectedlyhigh Insured losses, either legitimate (catastrophes)or fraudulent (which might be particularly prevalentin times of recession).

• Built-in inflation is induced by adaptive expecta-tions, and is often linked to the "price/wage spiral".It involves workers trying to keep their wages upwith prices (above the rate of inflation), and firmspassing these higher labor costs on to their cus-tomers as higher prices, leading to a 'vicious circle'.Built-in inflation reflects events in the past, and somight be seen as hangover inflation.

Demand-pull theory states that inflation accelerates whenaggregate demand increases beyond the ability of theeconomy to produce (its potential output). Hence,any factor that increases aggregate demand can causeinflation.[53] However, in the long run, aggregate demandcan be held above productive capacity only by increasingthe quantity of money in circulation faster than the realgrowth rate of the economy. Another (althoughmuch lesscommon) cause can be a rapid decline in the demand formoney, as happened in Europe during the Black Death, orin the Japanese occupied territories just before the defeatof Japan in 1945.The effect of money on inflation is most obvious whengovernments finance spending in a crisis, such as a civilwar, by printingmoney excessively. This sometimes leadsto hyperinflation, a condition where prices can double ina month or less. Money supply is also thought to play a

major role in determining moderate levels of inflation, al-though there are differences of opinion on how importantit is. For example, Monetarist economists believe that thelink is very strong; Keynesian economists, by contrast,typically emphasize the role of aggregate demand in theeconomy rather than the money supply in determining in-flation. That is, for Keynesians, the money supply is onlyone determinant of aggregate demand.Some Keynesian economists also disagree with the no-tion that central banks fully control the money supply,arguing that central banks have little control, since themoney supply adapts to the demand for bank credit is-sued by commercial banks. This is known as the theoryof endogenous money, and has been advocated stronglyby post-Keynesians as far back as the 1960s. It has todaybecome a central focus of Taylor rule advocates. This po-sition is not universally accepted – banks create moneyby making loans, but the aggregate volume of these loansdiminishes as real interest rates increase. Thus, centralbanks can influence the money supply by making moneycheaper or more expensive, thus increasing or decreasingits production.A fundamental concept in inflation analysis is the rela-tionship between inflation and unemployment, called thePhillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore,some level of inflation could be considered desirable inorder to minimize unemployment. The Phillips curvemodel described the U.S. experience well in the 1960sbut failed to describe the combination of rising infla-tion and economic stagnation (sometimes referred to asstagflation) experienced in the 1970s.Thus, modern macroeconomics describes inflation usinga Phillips curve that shifts (so the trade-off between in-flation and unemployment changes) because of such mat-ters as supply shocks and inflation becoming built intothe normal workings of the economy. The former refersto such events as the oil shocks of the 1970s, while thelatter refers to the price/wage spiral and inflationary ex-pectations implying that the economy “normally” suffersfrom inflation. Thus, the Phillips curve represents onlythe demand-pull component of the triangle model.Another concept of note is the potential output (some-times called the “natural gross domestic product”), a levelof GDP, where the economy is at its optimal level of pro-duction given institutional and natural constraints. (Thislevel of output corresponds to the Non-Accelerating In-flation Rate of Unemployment, NAIRU, or the “natural”rate of unemployment or the full-employment unemploy-ment rate.) If GDP exceeds its potential (and unemploy-ment is below the NAIRU), the theory says that inflationwill 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 willdecelerate as suppliers attempt to fill excess capacity, cut-ting prices and undermining built-in inflation.[54]

8 5 CAUSES

However, one problemwith this theory for policy-makingpurposes is that the exact level of potential output (and ofthe NAIRU) is generally unknown and tends to changeover time. Inflation also seems to act in an asymmet-ric way, rising more quickly than it falls. Worse, it canchange because of policy: for example, high unemploy-ment under British Prime Minister Margaret Thatchermight have led to a rise in the NAIRU (and a fall in poten-tial) because many of the unemployed found themselvesas structurally unemployed (also see unemployment), un-able to find jobs that fit their skills. A rise in structuralunemployment implies that a smaller percentage of thelabor force can find jobs at the NAIRU, where the econ-omy avoids crossing the threshold into the realm of ac-celerating inflation.

5.1.1 Unemployment

A connection between inflation and unemployment hasbeen drawn since the emergence of large scale unemploy-ment in the 19th century, and connections continue to bedrawn today. However, the unemployment rate gener-ally only affects inflation in the short-term but not thelong-term.[55] In the long term, the velocity of moneysupply measures such as the MZM (“Money Zero Ma-turity,” representing cash and equivalent demand de-posits) velocity is far more predictive of inflation than lowunemployment.[56]

InMarxian economics, the unemployed serve as a reservearmy of labor, which restrain wage inflation. In the20th century, similar concepts in Keynesian economicsinclude the NAIRU (Non-Accelerating Inflation Rate ofUnemployment) and the Phillips curve.

5.2 Monetarist view

Inflation and the growth of money supply (M2).

For more details on this topic, see Monetarism.

Monetarists believe the most significant factor influenc-ing inflation or deflation is how fast the money supply

grows or shrinks. They consider fiscal policy, or govern-ment spending and taxation, as ineffective in controllinginflation.[57] The monetarist economist Milton Friedmanfamously stated, “Inflation is always and everywhere amonetary phenomenon.” [58]

Monetarists assert that the empirical study of monetaryhistory shows that inflation has always been a monetaryphenomenon. The quantity theory of money, simplystated, says that any change in the amount of money ina system will change the price level. This theory beginswith the equation of exchange:

MV = PQ

where

M is the nominal quantity of money.V is the velocity of money in final expendi-tures;P is the general price level;Q is an index of the real value of final expen-ditures;

In this formula, the general price level is related to thelevel of real economic activity (Q), the quantity of money(M) and the velocity of money (V). The formula is anidentity because the velocity of money (V) is defined tobe the ratio of final nominal expenditure ( PQ ) to thequantity of money (M).Monetarists assume that the velocity of money is unaf-fected by monetary policy (at least in the long run), andthe real value of output is determined in the long run bythe productive capacity of the economy. Under these as-sumptions, the primary driver of the change in the gen-eral price level is changes in the quantity of money. Withexogenous velocity (that is, velocity being determined ex-ternally and not being influenced by monetary policy),the money supply determines the value of nominal out-put (which equals final expenditure) in the short run. Inpractice, velocity is not exogenous in the short run, andso the formula does not necessarily imply a stable short-run relationship between the money supply and nominaloutput. However, in the long run, changes in velocity areassumed to be determined by the evolution of the pay-ments mechanism. If velocity is relatively unaffected bymonetary policy, the long-run rate of increase in prices(the inflation rate) is equal to the long-run growth rateof the money supply plus the exogenous long-run rate ofvelocity growth minus the long run growth rate of realoutput.[10]

5.3 Rational expectations theory

For more details on this topic, see Rational expectationstheory.

9

Rational expectations theory holds that economic actorslook rationally into the future when trying to maximizetheir well-being, and do not respond solely to immediateopportunity costs and pressures. In this view, while gen-erally grounded in monetarism, future expectations andstrategies are important for inflation as well.A core assertion of rational expectations theory is that ac-tors will seek to “head off” central-bank decisions by act-ing in ways that fulfill predictions of higher inflation. Thismeans that central banksmust establish their credibility infighting inflation, or economic actors will make bets thatthe central bank will expand the money supply rapidlyenough to prevent recession, even at the expense of exac-erbating inflation. Thus, if a central bank has a reputationas being “soft” on inflation, when it announces a new pol-icy of fighting inflation with restrictive monetary growtheconomic agents will not believe that the policy will per-sist; their inflationary expectations will remain high, andso will inflation. On the other hand, if the central bankhas a reputation of being “tough” on inflation, then sucha policy announcement will be believed and inflationaryexpectations will come down rapidly, thus allowing infla-tion itself to come down rapidly with minimal economicdisruption.

5.4 Heterodox views

There are also various heterodox theories that downplayor reject the views of the Keynesians and monetarists.

5.4.1 Austrian view

See also: Austrian School and Monetary inflationThe Austrian School stresses that inflation is not uniformover all assets, goods, and services. Inflation depends ondifferences in markets and on where newly created moneyand credit enter the economy. Ludwig von Mises saidthat inflation should refer to an increase in the quantity ofmoney that is not offset by a corresponding increase in theneed for money, and that price inflation will necessarilyfollow.[59][60]

5.4.2 Real bills doctrine

Main article: Real bills doctrine

Within the context of a fixed specie basis for money, oneimportant controversy was between the quantity theoryof money and the real bills doctrine (RBD). Within thiscontext, quantity theory applies to the level of fractionalreserve accounting allowed against specie, generally gold,held by a bank. Currency and banking schools of eco-nomics argue the RBD, that banks should also be ableto issue currency against bills of trading, which is “realbills” that they buy from merchants. This theory was im-

portant in the 19th century in debates between “Banking”and “Currency” schools of monetary soundness, and inthe formation of the Federal Reserve. In the wake of thecollapse of the international gold standard post 1913, andthe move towards deficit financing of government, RBDhas remained a minor topic, primarily of interest in lim-ited contexts, such as currency boards. It is generally heldin ill repute today, with Frederic Mishkin, a governor ofthe Federal Reserve going so far as to say it had been“completely discredited.”The debate between currency, or quantity theory, andthe banking schools during the 19th century prefigurescurrent questions about the credibility of money in thepresent. In the 19th century the banking schools hadgreater influence in policy in the United States and GreatBritain, while the currency schools had more influence“on the continent”, that is in non-British countries, partic-ularly in the Latin Monetary Union and the earlier Scan-dinavia monetary union.

6 Controlling inflation

A variety of methods and policies have been proposedand used to control inflation.

6.1 Monetary policy

0

2

4

6

8

10

12

14

16

18

20

1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012

Per

cent

Date

Federal Funds Rate (effective)July 1954 to December 2008

The U.S. effective federal funds rate charted over fifty years.

Main article: Monetary policy

Governments and central banks primarily use monetarypolicy to control inflation. Central banks such as the U.S.Federal Reserve increase the interest rate, slow or stopthe growth of the money supply, and reduce the moneysupply. Some banks have a symmetrical inflation targetwhile others only control inflation when it rises above atarget, whether express or implied.Most central banks are tasked with keeping their inter-bank lending rates at low levels, normally to a target an-nual rate of about 2% to 3%, and within a targeted annualinflation range of about 2% to 6%. Central bankers target

10 6 CONTROLLING INFLATION

a low inflation rate because they believe deflation endan-gers the economy.Higher interest rates reduce the amount of money be-cause fewer people seek loans, and loans are usually madewith new money. When banks make loans, they usuallyfirst create new money, then lend it. A central bank usu-ally creates money lent to a national government. There-fore, when a person pays back a loan, the bank destroysthe money and the quantity of money falls. In the early1980s, when the federal funds rate exceeded 15 percent,the quantity of Federal Reserve dollars fell 8.1 percent,from $8.6 trillion down to $7.9 trillion.Monetarists emphasize a steady growth rate of moneyand use monetary policy to control inflation by increasinginterest rates and slowing the rise in the money supply.Keynesians emphasize reducing aggregate demand dur-ing economic expansions and increasing demand duringrecessions to keep inflation stable. Control of aggregatedemand can be achieved using both monetary policy andfiscal policy (increased taxation or reduced governmentspending to reduce demand).

6.2 Fixed exchange rates

Main article: Fixed exchange rate

Under a fixed exchange rate currency regime, a country’scurrency is tied in value to another single currency or to abasket of other currencies (or sometimes to another mea-sure of value, such as gold). A fixed exchange rate is usu-ally used to stabilize the value of a currency, vis-a-vis thecurrency it is pegged to. It can also be used as a meansto control inflation. However, as the value of the refer-ence currency rises and falls, so does the currency peggedto it. This essentially means that the inflation rate in thefixed exchange rate country is determined by the inflationrate of the country the currency is pegged to. In addition,a fixed exchange rate prevents a government from usingdomestic monetary policy in order to achieve macroeco-nomic stability.Under the Bretton Woods agreement, most countriesaround the world had currencies that were fixed to the USdollar. This limited inflation in those countries, but alsoexposed them to the danger of speculative attacks. Afterthe Bretton Woods agreement broke down in the early1970s, countries gradually turned to floating exchangerates. However, in the later part of the 20th century, somecountries reverted to a fixed exchange rate as part of anattempt to control inflation. This policy of using a fixedexchange rate to control inflation was used in many coun-tries in South America in the later part of the 20th century(e.g. Argentina (1991–2002), Bolivia, Brazil, and Chile).

6.3 Gold standard

Main article: Gold standardThe gold standard is a monetary system in which a re-

Two 20 kr gold coins from the Scandinavian Monetary Union, ahistorical example of an international gold standard.

gion’s common media of exchange are paper notes thatare normally freely convertible into pre-set, fixed quanti-ties of gold. The standard specifies how the gold backingwould be implemented, including the amount of specieper currency unit. The currency itself has no innate value,but is accepted by traders because it can be redeemed forthe equivalent specie. A U.S. silver certificate, for exam-ple, could be redeemed for an actual piece of silver.The gold standard was partially abandoned via the inter-national adoption of the Bretton Woods System. Underthis system all other major currencies were tied at fixedrates to the dollar, which itself was tied to gold at the rateof $35 per ounce. The BrettonWoods system broke downin 1971, causing most countries to switch to fiat money –money backed only by the laws of the country.Under a gold standard, the long term rate of inflation (ordeflation) would be determined by the growth rate of thesupply of gold relative to total output.[61] Critics arguethat this will cause arbitrary fluctuations in the inflationrate, and that monetary policy would essentially be deter-mined by gold mining.[62][63]

6.4 Wage and price controls

Main article: Incomes policy

Another method attempted in the past have been wageand price controls (“incomes policies”). Wage and pricecontrols have been successful in wartime environmentsin combination with rationing. However, their use inother contexts is far more mixed. Notable failures of theiruse include the 1972 imposition of wage and price con-trols by Richard Nixon. More successful examples in-clude the Prices and Incomes Accord in Australia and theWassenaar Agreement in the Netherlands.

11

In general, wage and price controls are regarded as atemporary and exceptional measure, only effective whencoupled with policies designed to reduce the underly-ing causes of inflation during the wage and price con-trol regime, for example, winning the war being fought.They often have perverse effects, due to the distorted sig-nals they send to the market. Artificially low prices oftencause rationing and shortages and discourage future in-vestment, resulting in yet further shortages. The usualeconomic analysis is that any product or service that isunder-priced is overconsumed. For example, if the offi-cial price of bread is too low, there will be too little breadat official prices, and too little investment in breadmakingby the market to satisfy future needs, thereby exacerbat-ing the problem in the long term.Temporary controls may complement a recession as a wayto fight inflation: the controls make the recession moreefficient as a way to fight inflation (reducing the need toincrease unemployment), while the recession prevents thekinds of distortions that controls cause when demand ishigh. However, in general the advice of economists isnot to impose price controls but to liberalize prices by as-suming that the economy will adjust and abandon unprof-itable economic activity. The lower activity will placefewer demands on whatever commodities were driving in-flation, whether labor or resources, and inflation will fallwith total economic output. This often produces a severerecession, as productive capacity is reallocated and is thusoften very unpopular with the people whose livelihoodsare destroyed (see creative destruction).

6.5 Stimulating economic growth

If economic growth matches the growth of the moneysupply, inflation should not occur when all else isequal.[64] A large variety of factors can affect the rateof both. For example, investment in market produc-tion, infrastructure, education, and preventative healthcare can all grow an economy in greater amounts thanthe investment spending.[65]

6.6 Cost-of-living allowance

See also: Cost of living

The real purchasing-power of fixed payments is eroded byinflation unless they are inflation-adjusted to keep theirreal values constant. In many countries, employmentcontracts, pension benefits, and government entitlements(such as social security) are tied to a cost-of-living index,typically to the consumer price index.[66] A cost-of-livingallowance (COLA) adjusts salaries based on changes ina cost-of-living index. It does not control inflation, butrather seeks to mitigate the consequences of inflation forthose on fixed incomes. Salaries are typically adjusted an-nually in low inflation economies. During hyperinflation

they are adjusted more often.[66] They may also be tied toa cost-of-living index that varies by geographic locationif the employee moves.Annual escalation clauses in employment contracts canspecify retroactive or future percentage increases inworker pay which are not tied to any index. These ne-gotiated increases in pay are colloquially referred to ascost-of-living adjustments (“COLAs”) or cost-of-livingincreases because of their similarity to increases tied toexternally determined indexes.

7 See also

• Inflation hedge

• List of countries by inflation rate

• Measuring economic worth over time

• Real versus nominal value (economics)

• Steady state economy

• Welfare cost of inflation

8 Notes[1] See:

• Wyplosz & Burda 1997 (Glossary);• Blanchard 2000 (Glossary)• Barro 1997 (Glossary)• Abel & Bernanke 1995 (Glossary)

[2] Why price stability?, Central Bank of Iceland, Accessedon September 11, 2008.

[3] Paul H. Walgenbach, Norman E. Dittrich and Ernest I.Hanson, (1973), Financial Accounting, New York: Har-court Brace Javonovich, Inc. Page 429. “The MeasuringUnit principle: The unit of measure in accounting shall bethe base money unit of the most relevant currency. Thisprinciple also assumes that the unit of measure is stable;that is, changes in its general purchasing power are notconsidered sufficiently important to require adjustmentsto the basic financial statements.”

[4] Mankiw 2002, pp. 22–32

[5] Mankiw 2002, pp. 238–255

[6] Robert Barro and Vittorio Grilli (1994), EuropeanMacroeconomics, Ch. 8, p. 139, Fig. 8.1. Macmillan,ISBN 0-333-57764-7.

[7] John Makin (November 2010). “Bernanke Battles U.S.Deflation Threat”. AEI.

[8] Paul Krugman; Gauti Eggertsson. “Debt,Deleveraging,and the liquidity trap: A Fisher‐Minsky‐Koo approach”.

12 8 NOTES

[9] “MZM velocity”. Retrieved September 13, 2014.

[10] Mankiw 2002, pp. 81–107

[11] Abel & Bernanke 2005, pp. 266–269

[12] Hummel, Jeffrey Rogers. “Death and Taxes, IncludingInflation: the Public versus Economists” (January 2007).p.56

[13] "Escaping from a Liquidity Trap and Deflation: The Fool-proof Way and Others" Lars E.O. Svensson, Journal ofEconomic Perspectives, Volume 17, Issue 4 Fall 2003, pp.145–166

[14] Taylor, Timothy (2008). Principles of Economics.Freeload Press. ISBN 1-930789-05-X.

[15] Dobson, Roger (January 27, 2002). “How Alexandercaused a great Babylon inflation”. The Independent.Archived from the original on April 12, 2012. RetrievedApril 12, 2010.

[16] Harl, Kenneth W. (June 19, 1996). “Coinage in the Ro-man Economy, 300 B.C. to A.D. 700”. Baltimore: TheJohns Hopkins University Press. ISBN 0-8018-5291-9.

[17] “Annual Report (2006), Royal Canadian Mint, p. 4”.Mint.ca. Retrieved May 21, 2011.

[18] Frank Shostak, "Commodity Prices and Inflation: What’sthe connection”, Mises Institute

[19] Richard von Glahn (27 December 1996). Fountain ofFortune: Money and Monetary Policy in China, 1000–1700. University of California Press. p. 48. ISBN 978-0-520-20408-9.

[20] Paul S. Ropp (9 July 2010). China in World History. Ox-ford University Press. p. 82. ISBN 978-0-19-517073-3.

[21] Peter Bernholz (2003). Monetary Regimes and Inflation:History, Economic and Political Relationships. Edward El-gar Publishing. pp. 53–55. ISBN 978-1-84376-155-6.

[22] Earl J. Hamilton, American Treasure and the Price Rev-olution in Spain, 1501–1650 Harvard Economic Studies,43 (Cambridge, Massachusetts: Harvard University Press,1934)

[23] John Munro: The Monetary Origins of the 'Price Revo-lution':South Germany Silver Mining, Merchant Banking,and Venetian Commerce, 1470–1540, Toronto 2003

[24] Walton, Timothy R. (1994). The Spanish Treasure Fleets.Pineapple Press (FL). p. 85. ISBN 1-56164-049-2.

[25] The Price Revolution in Europe: Empirical Results from aStructural Vectorautoregression Model. Peter Kugler andPeter Bernholz, University of Basel, 2007 (Demonstratesthat it was the increased supply of precious metals thatcaused it and notes the obvious logical flaws in the con-trary arguments that have become fashionable in recentdecades)

[26] Tracy, James D. (1994). Handbook of European History1400–1600: Late Middle Ages, Renaissance, and Refor-mation. Boston: Brill Academic Publishers. p. 655.ISBN 90-04-09762-7.

[27] Michael F. Bryan, "On the Origin and Evolution of theWord 'Inflation'"

[28] Mark Blaug, "Economic Theory in Retrospect", pg. 129:"...this was the cause of inflation, or, to use the languageof the day, 'the depreciation of banknotes.'"

[29] Chisholm, Hugh, ed. (1922). "Inflation". EncyclopædiaBritannica (12th ed.). London & New York.

[30] Michael F. Bryan,On the Origin and Evolution of theWord“Inflation"{research/Commentary/1997/]

[31] Federal Reserve Board’s semiannual Monetary Policy Re-port to the Congress’Introductory statement by Jean-Claude Trichet on July 1, 2004]

[32] “What is inflation? - Inflation, explained - Vox”. Vox. July25, 2014. Retrieved September 13, 2014.

[33] Kiley, Michael J. (2008/feds/2008/2008/2008). Estimat-ing the common trend rate of inflation for consumer pricesand consumer prices excluding food and energy prices. Fi-nance and Economic Discussion Series (PDF) (Federal Re-serve Board). Check date values in: |date= (help)

[34] See:

• Taylor & Hall 1993;• Blanchard 2000;•

The consumer price index measures movements in pricesof a fixed basket of goods and services purchased by a“typical consumer”.

[35] The numbers reported here refer to the US ConsumerPrice Index for All Urban Consumers, All Items, seriesCPIAUCNS, from base level 100 in base year 1982. Theywere downloaded from the FRED database] at the FederalReserve Bank of St. Louis on August 8, 2008.

[36] “Median Price Changes: An Alternative Approach toMeasuring Current Monetary Inflation” (PDF). RetrievedMay 21, 2011.

[37] “IMF reprimands Argentina for inaccurate economicdata”. Retrieved February 2, 2013.

[38] “Argentina Becomes First Nation Censured by IMF onEconomic Data”. Retrieved February 2, 2013.

[39] Bulkley, George (March 1981). “Personal Savings andAnticipated Inflation”. The Economic Journal 91 (361):124–135. doi:10.2307/2231702. JSTOR 2231702.

[40] “Encyclopædia Britannica”. Encyclopedia Britannica.Retrieved September 13, 2014.

[41] “Les Egyptiens souffrent aussi de l'accélération del'inflation”, Céline Jeancourt-Galignani – La Tribune,February 10, 2011

[42] AFP (January 27, 2011). “Egypt protests a ticking timebomb: Analysts”. The New Age. Retrieved January 29,2011.

[43] “Les prix alimentaires proches de «la cote d'alerte»" – LeFigaro, with AFP, February 20, 2011

13

[44] Steve H. Hanke (July 2013). “North Korea: From Hyper-inflation to Dollarization?". Retrieved August 21, 2014.

[45] Thorsten Polleit, "Inflation Is a Policy that Cannot Last",Mises Institute

[46] Tobin, James, American Economic Review, march(1969), “Inflation and Unemployment”

[47] Mundell, James, Journal of Political Economy, LXXI(1963), 280–83 “Inflation and Real Interest”

[48] Tobin, J. Econometrica, V 33, (1965), 671–84 “Moneyand Economic Growth”

[49] Tsaing, S.C., Journal of Money, Credit and Banking,I(1969), 266–80 “ACritical Note on the Optimum Supplyof Money”

[50] (p272)

[51] Federal Reserve Board’s semiannual Monetary Policy Re-port to the Congress RoundtableIntroductory statement byJean-Claude Trichet on July 1, 2004

[52] Robert J. Gordon (1988), Macroeconomics: Theory andPolicy, 2nd ed., Chap. 22.4, 'Modern theories of inflation'.McGraw-Hill.

[53] O'Sullivan, Arthur; Sheffrin, Steven M. (2003) [Jan-uary 2002]. Economics: Principles in Action. The WallStreet Journal:Classroom Edition (2nd ed.). Upper Sad-dle River, New Jersey 07458: Pearson Prentice Hall: Ad-dison Wesley Longman. p. 341. ISBN 0-13-063085-3.Retrieved May 3, 2009.

[54] Coe, David T. “Nominal Wages. The NAIRU and WageFlexibility”. Organisation for Economic Co-operation andDevelopment.

[55] Chang, R. (1997) “Is Low Unemployment Inflation-ary?" Federal Reserve Bank of Atlanta Economic Review1Q97:4–13

[56] Oliver Hossfeld (2010) “US Money Demand, MonetaryOverhang, and Inflation Prediction” International Networkfor Economic Research working paper no. 2010.4

[57] Lagassé, Paul (2000). “Monetarism”. The Columbia En-cyclopedia (6th ed.). New York: Columbia UniversityPress. ISBN 0-7876-5015-3.

[58] Friedman, Milton. A Monetary History of the UnitedStates 1867–1960 (1963).

[59] Von Mises, Ludwig (1912). The Theory of Money andCredit (1953 ed.). Yale University Press. p. 240. Re-trieved 23 January 2014. In theoretical investigation thereis only one meaning that can rationally be attached to theexpression Inflation: an increase in the quantity of money(in the broader sense of the term, so as to include fidu-ciary media as well), that is not offset by a correspondingincrease in the need for money (again in the broader senseof the term), so that a fall in the objective exchange-valueof money must occur.

[60] The Theory of Money and Credit, Mises (1912, [1981],p. 272)

[61] Bordo, M. (2002) “Gold Standard” Concise Encyclopediaof Economics

[62] Barsky, Robert B; J Bradford DeLong (1991).“Forecasting Pre-World War I Inflation: The FisherEffect and the Gold Standard”. Quarterly Journal ofEconomics 106 (3): 815–36. doi:10.2307/2937928.JSTOR 2937928. Retrieved September 27, 2008.

[63] DeLong, Brad. “Why Not the Gold Standard?". Re-trieved September 25, 2008.

[64] Sigrauski, Miguel (1961). “Inflation and EconomicGrowth”. Journal of Political Economy 75 (6): 796–810.doi:10.1086/259360.

[65] Henderson, David R. (1999). “Does Growth CauseInflation?". Cato Policy Report 21 (6 September18, 2012)./2011/01/02/business/20110102-metrics-graphic.html “In Investing, It’s When You Start AndWhen You Finish"], New York Times, January 2, 2012

[66] Flanagan, Tammy (September 8, 2006). “COLA Wars”.Government Executive. National Journal Group. Re-trieved September 23, 2008.

9 References• Abel, Andrew; Bernanke, Ben (2005). “Macroeco-nomics” (5th ed.). Pearson.

• Barro, Robert J. (1997). Macroeconomics. Cam-bridge, Mass: MIT Press. p. 895. ISBN 0-262-02436-5.

• Blanchard, Olivier (2000). Macroeconomics (2nded.). Englewood Cliffs, N.J: Prentice Hall. ISBN0-13-013306-X.

• Mankiw, N. Gregory (2002). “Macroeconomics”(5th ed.). Worth.

• Hall, Robert E.; Taylor, John B. (1993). Macroeco-nomics. New York: W.W. Norton. p. 637. ISBN0-393-96307-1.

• Burda, Michael C.; Wyplosz, Charles (1997).Macroeconomics: a European text. Oxford [Ox-fordshire]: Oxford University Press. ISBN 0-19-877468-0.

10 Further reading• Auernheimer, Leonardo, “The Honest Govern-ment’s Guide to the Revenue From the Creation ofMoney,” Journal of Political Economy, Vol. 82, No.3, May/June 1974, pp. 598–606.

• Baumol, William J. and Alan S. Blinder,Macroeco-nomics: Principles and Policy, Tenth edition. Thom-son South-Western, 2006. ISBN 0-324-22114-2

14 11 EXTERNAL LINKS

• Friedman, Milton, Nobel lecture: Inflation and un-employment 1977

• Mishkin, Frederic S., The Economics of Money,Banking, and Financial Markets, New York, HarperCollins, 1995.

• Federal Reserve Bank of Boston, “UnderstandingInflation and the Implications for Monetary Policy:A Phillips Curve Retrospective”, Conference Se-ries 53, June 9–11, 2008, Chatham, Massachusetts.(Also cf. Phillips curve article)

11 External links• OECD Consumer Price Index.

• United States Bureau of Labor Statistics - ConsumerPrice Index.

• U.S. Cost of Living Calculator (1913–present)(AIER).

• U.S. Inflation Calculator (1913–present) (US BLS).

• USD Inflation Calculator

• U.S. Inflation (historical documents) (FRASER).

• World Inflation (1290–2006) (Consumer Price In-dex) (Swedish Riksbank).

• Quandl, United States Inflation Overview, collec-tion of time series data from Federal Reserve, WorldBank, United Nations

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12 Text and image sources, contributors, and licenses

12.1 Text• Inflation Source: http://en.wikipedia.org/wiki/Inflation?oldid=648941936 Contributors: WojPob, Bryan Derksen, The Anome, Jeronimo,Andre Engels, Arvindn, Gianfranco, Enchanter, Tim Shell, William Avery, SimonP, Anne, Gretchen, Heron, Octothorn, Mrwojo, Edward,Michael Hardy, Earth, Mic, 172, Tomi, Tiles, Kosebamse, Ahoerstemeier, Mac, Angela, Xneilj, Susurrus, Andres, Cherkash, Mxn, Smack,Ed Brey, Nikola Smolenski, Timwi, Gutza, Greenrd, IceKarma, Tpbradbury, Maximus Rex, Furrykef, Topbanana, Johnleemk, Pumpie,Robbot, ChrisO, Jakohn, Fredrik, R3m0t, Altenmann, Romanm, Modulatum, Calmypal, Texture, Sekicho, Mervyn, Hadal, Vikingstad,Diberri, BovineBeast, Dina, Terjepetersen, Stirling Newberry, Jpo, Giftlite, JamesMLane, Mshonle, Fennec, Harp, Mintleaf, Tom harri-son, Elinnea, Bensaccount, Thetorpedodog, Eagle, Masken, Owen&rob, SWAdair, Bobblewik, Christopherlin, Wmahan, MSTCrow, Ul-travoices, Confuzion, Jofi, R. fiend, CryptoDerk, SarekOfVulcan, LiDaobing, Jdevine, Fangz, Antandrus, Onco p53, MisfitToys, Jdc1687,Neffk, OwenBlacker, RayBirks, Tacitus Prime, Scott Burley, Sam Hocevar, Jeremykemp, MementoVivere, Randwicked, SYSS Mouse,Freakofnurture, Monkeyman, Dissipate, RedWordSmith, EugeneZelenko, Discospinster, Rich Farmbrough, Jpk, Notinasnaid, SpookyMul-der, Night Gyr, Bender235, ESkog, Lalala666, Kaszeta, Cedders, Mwanner, Jonon, Shanes, Haxwell, Shudder, RoyBoy, Jason Yuy, Causasui, Grick, Bobo192, Cretog8, Ntmatter, Wood Thrush, Dreish, Flxmghvgvk, Cmdrjameson, Johnteslade, Maurreen, Pokrajac, Speedy-Gonsales, Toh, Jerryseinfeld, DG, Nk, JavOs, Nsaa, A2Kafir, Geschichte, Jumbuck, Alansohn, Gary, PaulHanson, Anthony Appleyard,Mo0, Guy Harris, Denoir, Eric Kvaalen, Hipocrite, Ricky81682, John Quiggin, MarkGallagher, BernardH, Idont Havaname, Hohum,Snowolf, Wtmitchell, BRW, Max Naylor, Amorymeltzer, Rdrs, Kazvorpal, Mahanga, Crosbiesmith, Bobrayner, Rodii, Nuno Tavares,Boothy443, Kelly Martin, 2004-12-29T22:45Z, Camw, Wdyoung, Ylem, Marc K, Commander Keane, Lambticc, Chochopk, MONGO,Tabletop, Bkwillwm, Wikiklrsc, Bluemoose, Maartenvdbent, Wayward, , CigarStoreIndian, Gimboid13, DaveApter, Dysepsion,Xcuref1endx, LimoWreck, Ashmoo, Graham87, Deltabeignet, Magister Mathematicae, Wachholder0, FreplySpang, Jtdouglas, Drbog-dan, Rjwilmsi, Buldri, Davidp, Vary, Strait, Salix alba, MZMcBride, Tawker, Feco, DickClarkMises, Cassowary, Dillon256, Ravidreams,Titoxd, WikiAce, Wragge, FlaBot, Patrick1982, AdnanSa, Crazycomputers, Pathoschild, RexNL, New Thought, Fephisto, Fresheneesz,Error9900, Chobot, DVdm, Volunteer Marek, Bgwhite, Chwyatt, WriterHound, Gwernol, FrankTobia, Roboto de Ajvol, YurikBot, Wave-length, RattusMaximus, Pip2andahalf, Tjss, Hauskalainen, Splash, Nesbit, Stephenb, Polluxian, Gaius Cornelius, Vibritannia, Morphh,MistaTee, NawlinWiki, Svv, Wiki alf, Nirvana2013, Hagiographer, Retired username, Rbarreira, Malcolma, Emersoni, Tony1, Buck-etsofg, Rwalker, DeadEyeArrow, Cardsplayer4life, Wknight94, FF2010, Geremy78, Shinhan, Smoggyrob, Closedmouth, Arthur Rubin,Pb30, ASmartKid, Dspradau, Livitup, Acctorp, Mozkill, NаzismIsntCool, JLaTondre, Chris1219, David Biddulph, Haramis, Hirudo,Jaysbro, Carlosguitar, RandallZ, Roke, Flix2000, ChemGardener, Minnesota1, Yvwv, SmackBot, Rose Garden, Ramneek, Unyoyega,Lawrencekhoo, Boggabri, Allixpeeke, Watercolour, KVDP, Edgar181, IstvanWolf, Gilliam, Ohnoitsjamie, Vince433, Tv316, Chris thespeller, Keegan, Audacity, Deception, Revised Edition, VQuick, Rothery, Wackymax, Apeloverage, Panache, Dustimagic, CSWarren,Ikiroid, Nbarth, Baa, Zven, Redline, Rogermw, OrphanBot, Xyzzyplugh, LeContexte, Addshore, Normxxx, Khoikhoi, RealValueAccount-ing.Com, Robma, Jiddisch, Funky Monkey, Gokmop, Lyrrad0, RandomP, Lcarscad, LavosBaconsForgotHisPassword, Jklin, DMacks,Ohconfucius, SashatoBot, Lambiam, AThing, Harryboyles, Mouse Nightshirt, Teneriff, Kuru, F15x28, Vgy7ujm, AnonEMouse, Evenios,Wttsmyf2, Bobron, Mgiganteus1, IronGargoyle, Bilby, Nagle, Pluckerpluck, Voceditenore, Grumpyyoungman01, Pondle, Slakr, Werdan7,Crh66, Martinp23, Optimale, Imagine Wizard, Vandin, MrArt, Therebelcountry, Aarktica, Doczilla, Dhp1080, Peter Horn, Thatcher, PaulNollen, Vagary, Beefyt, Hu12, Iridescent, Zootsuits, Carbonate, Colonel Warden, Joseph Solis in Australia, JoeBot, Shoeofdeath, Exan-der, Lenoxus, Civil Engineer III, Tawkerbot2, Bobby131313, Pithecanthropus, AbsolutDan, 1122334455, Mikiemike, CmdrObot, Tan-thalas39, Dycedarg, Unionhawk, Van helsing, Vision Thing, Thajigisup, JohnCD, Kris Schnee, Cofax48, DanielRigal, Cumulus Clouds,Thomasmeeks, Requestion, WeggeBot, Neelix, Ken Gallager, Johnlogic, Equendil, ProfessorPaul, Shanoman, Yaris678, Jasperdoomen,Kitteneatkitten, Gogo Dodo, Luckyherb, Stephen lau, Peer V, Tawkerbot4, DumbBOT, Pederbl, Omicronpersei8, Jguard18, Jinu51286,Satori Son, Click23, DJBullfish, Thijs!bot, Epbr123, Sisalto, Mercury, JDK77590, Lemonander, Mathmoclaire, N5iln, Wahlin, Chenx064,Marek69, Hermes Agathos, Rockhurst singer, James086, E. Ripley, Notmyrealname, FreeKresge, Gcolive, Haloepsilon, Sordomudo11,Ianozsvald, Mentifisto, SuperCow, Superbub, AntiVandalBot, Widefox, Genixpro, Kruglick, Paul from Michigan, HarryHello, Carol-mooredc, Akshayaj, Quintote, SmokeyTheCat, Pro crast in a tor, Gregalton, AubreyEllenShomo, Myanw, Mhagerman, Ristonet, Leuko,Davewho2, Barek, MER-C, Mcorazao, Tonyrocks922, Kruckenberg.1, Andonic, Greensburger, SiobhanHansa, Bencherlite, Teknari,EvilPizza, Bongwarrior, VoABot II, Professor marginalia, Smartal, Freakieboy86, Kuyabribri, Yakushima, Mjdon67, JBKramer, Twsx,Sillsm, Brusegadi, Jjasi, NotACow, Catgut, Cyktsui, Winterus, Thedreamdied, Racanu, Beagel, SlamDiego, DerHexer, Textorus, Calltech,Ptrpro, FisherQueen, Hdt83, MartinBot, Matt Lewis, Fazili786, Ultraviolet scissor flame, Glendoremus, R'n'B, CommonsDelinker, Ghile-man, J.delanoy, Trusilver, Levylwesela, EscapingLife, UBeR, Xris0, Katalaveno, Ncmvocalist, Sonical, Mikael Häggström, Uncompetence,AntiSpamBot, Colchicum, Z Lopez, T Gholson, Oddeven2002, NewEnglandYankee, Obzabor, DadaNeem, Digvijaytrivedi, Dodge1884,Foofighter20x, Silas Marceau, Diletante, Natl1, Sam beezneez, S, JohnDoe0007, Idioma-bot, Funandtrvl, Tokenhost, TheRothbardian, Sir-mont, Blue bolt9, Deor, VolkovBot, CWii, Satishgupta05, Johan1298, AlnoktaBOT, Philip Trueman, Marekzp, Bjohnson925, Werdoop,TXiKiBoT, CriticalKnowledge, Rizalninoynapoleon, Wikilectual, Miranda, Goldenjet, Sintaku, Seraphim, Gamezhero, LeaveSleaves,Wassermann, MikaNystrom, RNMJU, Rich0908, BotKung, ACEOREVIVED, Larklight, Dirkbb, Lamro, Graymornings, Ziphon, Envi-roboy, Phmoreno, Imscoop22, Insanity Incarnate, Nicolaas Smith, Logan, Herbou, Hazel77, S.Örvarr.S, SieBot, K. Annoyomous, Tresiden,Graham Beards, Drvrage, Manixrock, Metaprax, Nathan, Cadwallader, Keilana, Perspicacite, Jvs, MinorContributor, Oda Mari, JLKrause,Jonahtrainer, Oxymoron83, Nuttycoconut, OKBot, C'est moi, Cmoti, Foggy Morning, Mygerardromance, Graemejclark, Nn123645,Gideongono, Chimbwidz, Kojo2000, Joeblogger, Miss World, Rinconsoleao, Denisarona, GoogleMac, Economy speak, D´Artgnan, Nico-laas J Smith, Troy 07, Vivo78, WikipedianMarlith, HathNo, Kenji000, EGeek, Elassint, ClueBot, LAX, Orangedolphin, Zihwye, Pipep-Bot, Snigbrook, The Thing That Should Not Be, Stanleywinthrop, Stupid2, Lungslungs, Chrisbecks, Ewawer, Daninbrisvegas, Gazifika-tor, Soaringbear, Niceguyedc, Edayapattiarun, Rickdoetmee, Marcbaldwin27, ChandlerMapBot, ScottBuckley, Dotter, Dwrcan, Alexbot,Addy14, Darkmasterjoey, NuclearWarfare, Subdolous, Ember of Light, Chrisnoscrub047, Redthoreau, Maria.s.bowman, Thingg, NJGW,Qwfp, Doopdoop, Cpsteiner, DrTh0r, BigK HeX, 03md, XLinkBot, Mangy Cheshire Cat, BodhisattvaBot, Dudeedud, Dollarbills, MitchAmes, WikHead, NellieBly, Ole Bear 2, PL290, WikiDao, Airplaneman, Addbot, Railu, Willking1979, Totalloss, Some jerk on the In-ternet, FashionMan, Decoyjames, FrankAndProust, Jmlthr, Harry221, Ronhjones, Kmeisterling, Natalia19951995, Aboctok, Donald12,Cst17, Download, Gtk123, Vega2, Ashaktur, Casperdc, Buddha24, Kyle1278, Economix4, LinkFA-Bot, Teac82, Tassedethe, Ehrenkater,$1000000000ten0one1, Tide rolls, Teles, David0811, Greyhood, Legobot, Kjkkkjj, Kurtis, Luckas-bot, Yobot, MikeStuff, 2D, Arsenal-Henry2, Fraggle81, TaBOT-zerem, Cameronthom, Skarsa72, II MusLiM HyBRiD II, Ulbsterlad, Darx9url, Mark Borgschulte, K Soze,Ajh16, SturmTiger42, KamikazeBot, Baig hyder, Suman231, AnomieBOT, Misessus, 1exec1, X-11111, TruthComesFromAGunBoat, Pi-ano non troppo, Ubitubi, AdjustShift, Grolltech, Soxwon, Kingpin13, Rohan.sankhla, Sepo San Borg, Mr Trichet, WhiteItems, PennySeven,Jessehillbilly3590, SystemicDestruction, Citation bot, Cleapow223, Bob Burkhardt, Eskandarany, Xqbot, Pasela, Zad68, Ron Paul...Ron

16 12 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

Paul..., Bbarkley, JimVC3, Capricorn42, 4twenty42o, Vidshow, TheWeakWilled, Srich32977, Shiju.johns, False vacuum, Oscarjquintana,RibotBOT, Revoprod, Crashdoom, West Coast Gordo, C4andrei, Doulos Christos, Smallman12q, Vrlak, Causeality, FrescoBot, Dalen ath,LucienBOT, Paine Ellsworth, VS6507, Alejandroadan, Annexatious, Oh Dany Boy, Raptor001, Citation bot 1, Joshuamaggid, Pinethicket,Notedgrant, Bithongabel, Wikitza, BRAZILHYPERINFLATION, ElNuevoEinstein, Kmm8392, BryanDeMorton, TFJamMan, Mjs1991,Bbarkley2, عقیل ,کاشف Jonkerz, Vrenator, Duoduoduo, Gstacy4, AGConsulting, Brian the Editor, Tbhotch, Verdun Road, Discov-ery Drive, Jurgen Gerber, Laurie Civico, Research adventure, Prof.Nazar, RjwilmsiBot, Noommos, Mwsugarman, Sparky1234567890,Lac.ideas, EmausBot, John of Reading, WikitanvirBot, Inflationhawk, Dewritech, Guerilla Brigade, MoneyCreatingThing, Sleekgray,RenamedUser01302013, Sp33dyphil, MBiemans, K6ka, Thecheesykid, Claire McLachlan, The Nut, Supa15, Prathamjohnkamath, Eri-anna, Bikari, Sahim, FrankFlanagan, Gut Monk, Ssk352, Donner60, BioBrain, Anonimski, Bellstarr, Sven Manguard, DASHBotAV,Rocketrod1960, Clydesidemounter, Mikhail Ryazanov, ClueBot NG, NotAGroup, Pockishdec, Dash1224, Joe1345, LogX, This lousy T-shirt, Cminboone, Qubio, Prutter-lugter-godt, Frietjes, ScottSteiner, Widr, Rurik the Varangian, Krunkdamighty, Gedankenhoren, Aman-ski, Vibhijain, Ronstar111, Helpful Pixie Bot, Mophedd, Wertyu739, FatTrebla, Calabe1992, Wbm1058, Isaltino Swissa, DBigXray,Guest2625, Ditsem, BG19bot, Walk&check, Iselilja, Amelapay, PD1980, Wiki13, Eugene yk2011, Himan42, Abrahamdsl, Dickman115,Pookie17, Jimjim168, Rowan Price, BattyBot, Tutelary, ChangingPrices, Nyancatz, Th4n3r, CodyTCBY, SilverLiningXX, EarPhone2,Malhas2, NitRav, Ducknish, VCGJakeRyan, Dhakauser, Vlegros, Lugia2453, Hair, Rul3rOfW1k1p3d1a, Cupco, SPECIFICO, ER-RPolution, ZX95, Sarah helm, TGForensic22, Narddog43, Denzel7777, JimmyTheMaker, EJM86, MiguelMadeira, , Waqar337,Tintin1974, Sam9970, My name is not dave, Jianhui67, Oraxio, Usmanalilovesgemma, JaconaFrere, Soibangla, Csusarah, Josephbaines,Loggit, Mahusha, M Tracy Hunter, Monkbot, Ogilvy57, SantiLak, BethNaught, FlappyBird, Samanta Snowdy, Rapier Half-Witt, Jatintewari, Brianrisk, Nioshen, Pigovian, Lonestar100 and Anonymous: 1270

12.2 Images• File:2013_Inflation_rates_map_of_the_world_per_International_Monetary_Fund.svg Source: http://upload.wikimedia.org/wikipedia/commons/d/d2/2013_Inflation_rates_map_of_the_world_per_International_Monetary_Fund.svg License: CC BY-SA 4.0Contributors: Own work Original artist: M Tracy Hunter

• File:Emblem-money.svg Source: http://upload.wikimedia.org/wikipedia/commons/f/f3/Emblem-money.svg License: GPL Contributors:http://www.gnome-look.org/content/show.php/GNOME-colors?content=82562 Original artist: perfectska04

• File:Federal_Funds_Rate_(effective).svg Source: http://upload.wikimedia.org/wikipedia/commons/7/7d/Federal_Funds_Rate_%28effective%29.svg License: CC BY-SA 3.0 Contributors: self-made using data from the Federal Reserve[1] The gnuplot source codeused to generate the graph is found on its discussion page at Wikimedia Commons. Original artist: Kbh3rd

• File:M2andInflation.png Source: http://upload.wikimedia.org/wikipedia/commons/8/80/M2andInflation.png License: CC BY-SA 3.0Contributors: Own work Original artist: Bkwillwm

• File:Two_20kr_gold_coins.jpg Source: http://upload.wikimedia.org/wikipedia/commons/9/92/Two_20kr_gold_coins.jpg License: CC0Contributors: Own work Original artist: Anonimski

• File:US_Historical_Inflation_Ancient.svg Source: http://upload.wikimedia.org/wikipedia/commons/2/20/US_Historical_Inflation_Ancient.svg License: Public domain Contributors: Wikipedia EN Original artist: Lalala666

• File:US_Inflation.png Source: http://upload.wikimedia.org/wikipedia/commons/8/83/US_Inflation.png License: CC0 Contributors:Own work Original artist: Lawrencekhoo

12.3 Content license• Creative Commons Attribution-Share Alike 3.0