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What Is Inflation?

Views 9492022.06.07

Core points

  • Inflation refers to an economic phenomenon in which prices continue to rise generally.

  • Inflation rate = (current price level-base period price level) / base period price level * 100%.

  • According to the causes, inflation is generally divided into three types: demand-driven, cost-driven and structural.

    Detailed explanation of concept

    Theoretically, inflation is an economic phenomenon that the currency in circulation exceeds the actual demand and prices continue to rise under the condition of paper money circulation. its essence is the phenomenon that the total social demand is greater than the total social supply.

    From the perspective of economic performance, inflation refers to a comprehensive, sustained and substantial rise in the price level of general goods and services. Inflation has the following main characteristics:

    The first is the rise in the prices of general goods and services, rather than those of stocks, bonds and other financial assets.

    The second is the overall rise in the price level, that is, the overall rise in the price level of goods and services, rather than the price level of specific goods and services or in some areas.

    Third, the sustained rise in the price level, rather than an accidental, short-term price rise. The fourth is to see whether the money supply is too large.

    Measure inflation

    The cost of living for consumers depends on the price of many goods and services and their respective share of household budgets. In order to measure the average cost of living of consumers, the government has conducted some household surveys to determine the basket of goods that people usually buy and to track the cost of buying the basket over a period of time.

    In a given period, the ratio of the price of this basket to the price of the base year is the consumer price index (CPI), and the percentage change of CPI is consumer price inflation, which is the most widely used indicator of inflation.

    Inflation rate = (current price level-base price level) / base price level * 100%

    For example, if the CPI in the base year is 100 and the current CPI is 110, then the inflation rate during this period is 10 per cent.

    Classification of inflation

    With the acceleration of the process of economic globalization, the causes of inflation are also changing, but at present, according to the causes and performance of inflation, inflation is generally divided into three types: demand-driven, cost-driven and structural.

    • Demand-driven inflation

    This is an analysis of the causes of inflation from the perspective of aggregate demand, arguing that the cause of inflation lies in the excessive growth of aggregate demand and insufficient aggregate supply, that is, "too much money pursues fewer goods". Or because the demand for goods and services exceeds the supply available at current prices, the general price level rises. "

    • Cost-driven inflation

    This is to analyze the causes of inflation from the perspective of aggregate supply. Supply is production. According to the production function, production depends on cost. Therefore, from the perspective of aggregate supply, the cause of inflation lies in the increase in costs. The increase in cost means that the same level of production can be achieved only when it is higher than the previous price level, and the increase in price is cost-driven inflation.

    • Structural inflation

    Structural inflation means that when the total demand is not too much, there is too much demand for products in some sectors, resulting in a rise in the prices of some products, such as steel, pork, property market, edible oil and so on. If structural inflation is not effectively curbed, it will evolve into cost-driven inflation, resulting in overall inflation.

    Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.
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