Inflation is when the cost of goods and services goes up. Inflation is normally measured by using “The Consumer Price Index—most frequently referred to as the CPI, based on the retail diaries of 24,000 individuals.” (Kasperkevic,2018). People write down what they need to get to how much it costs, then the information is used to determine how the costs of these goods are shifting. Since these individuals are set in urban areas worldwide, the CPI offers an additional holistic view of what's going on at prices rather than a visit to only one store.
There are various inflation indexes, one of them being several various government agencies that produce different price indices. All of these indexes demonstrate the same large-scale variations over time. Inflation was high in the 1970s and low recently. “Electronics have become cheaper and medical treatment has become more costly. But indexes quantify very different items, and do vary over time, and are particularly likely to diverge over longer periods.” (Yglesias,2015).
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Thus comes the chained CPI, A popular recommendation in policy circles is that the government should avoid using the CPI instead of going to a chained version of the index. The chained index accounts more vigorously for market substitutions between related categories of products. If the bad weather kills the pear crop, driving pear prices up an unchained price index will record it as a good dose of inflation. A chained index suggests that more consumers will likely skip these precious pears and eat apples instead, indicating a more moderate dose of inflation.
Consumption is known to be a primary determinant of well-being for every economy. It represents a variety of significant economic characteristics, including affordability, inequalities, and the like. Consumption activity is one of the true indicators of the fiscal, political, and social state of a society at a given time or over time. This is one of the exclusive metrics that captures the different intertwined problems of society. “Though worldwide research related to consumption has gained momentum for the last three to four decades, in India it is still at a nascent stage. Most of the consumption-related research in India is still geared towards understanding inequality and poverty instead of looking at its implications on economy and business decision making.” (Mukhopadhyay,2018)
Many wondered how the CPI relates to inflation, While the CPI is often equivalent to inflation, it calculates inflation only as perceived by customers. It is not, though, the only measure of inflation. The consumer price index (PPI) calculates inflation in the manufacturing process and the labor cost index measures inflation in the labor market. The foreign pricing program indicates inflation for imports and exports, while the gross domestic product deflator includes inflation faced by individuals, governments, and others.
Then comes the problem with measuring the inflation rate: Changes to the quality of the goods. Changes in the quality of goods mean that price adjustments do not indicate inflation, but rather the fact that they have changed well. “Computers, for example, have far more capabilities than they did 10 years before but it's impossible to compare prices when they are different products.” (Warr,2019). Products can likely deteriorate in terms of quality and size. Then comes the problem of deflation, which is the opposite of inflation. It may be exactly defined as a negative inflation rate, or where the rate of inflation is below 0 percent. Although the presence of deflation should be self-evident (as the antithesis of inflation), there is a lot of misconception about what it is and what it implies. When deflation increases the inflation-adjusted interest rate, it can lead consumers to spend less on luxury goods, such as vehicles, furniture, and houses bought with credit.
Increasing inflation-adjusted interest rates often raise borrowing costs and can depress business activity. “How to measure inflation is a highly technical issue and involves many choices that could have significant consequences for the level and dynamics of the series one would like to construct. At the same time, it is important to measure inflation transparently and credibly, one that is understood by different constituencies of society.”( Patel,2020). A real-life example of issues that are caused by incorrect statistics of the inflation rate of a country is, “On Thursday, 4 June 2008, despite deepening gloom over the economic prospects and intense political pressure, the European Central Bank (ECB) raised interest rates to their highest level for almost seven years. The quarter-point increase to 4.25% came after ECB President Jean-Claude Trichet sounded a warning that eurozone inflation could “explode” without decisive action.” (Pettinger,2019). The rise was the first for a year and took rates to a level last seen in September 2001, just before a series of cuts in the wake of the 11 September terrorist attacks on the United States.
Worldwide, in both developing and developed economies, people are seeing the collapse of economic policy and its unavoidable consequences: poor economic growth, growing financial fragility, high unemployment, sluggish incomes, growing income and wealth inequalities, and a worsening climate. On the monetary policy side, the many years of austerity policies have culminated in immeasurable damage that would take decades to be done away with. Governments have, either by intention or by statute, avoided using monetary policies to resolve the mounting challenges of a capitalist system that has helped relatively little. “The remedy suggested along these flawed lines is further austerity, amid a new report by the International Monetary Fund that confirms the idea that austerity has done more damage than good”. (Hersh,2010)
The financial crisis was largely triggered, prolonged, and intensified by a series of government decisions and interventions. The property boom and bust that precipitated the recession also culminated in an exceedingly loose monetary policy. As the housing bomb came to an end, the Federal Reserve misdiagnosed financial markets' confusion about the position and valuation of volatile subprime mortgage-backed securities as being, instead a liquidity problem, and took excessive countervailing measures that had side effects that included raising the price of oil. “Finally, in mid‐September 2008, the government's ad‐hoc bailouts, and the unpredictable terms of the proposed tarp legislation, appear to have caused a sharp spike in uncertainty in the financial markets.” (Taylor,2009). “Demand Pull Inflation involves inflation rising as the real Gross Domestic Product rises and unemployment falls, as the economy moves along the Phillips Curve. Demand-Pull Inflation is commonly described as too much money chasing too few goods.” (Agarwal,2018.)
Concluding Inflation affects multiple sectors of the economy its effect including income and wealth distribution development, finance, the balance of payments, monetary policy, the social system, the political environment, and various types of citizens (debtors and borrowers, wage earners, fixed-income groups, investors and shareholders). If inflation approaches acceptable limits, it has negative consequences. It decreases the valuation of capital, confusing the value of profits and losses of investors, lenders, buyers, and sellers. Growing confusion discourages savings and spending. Not only does high inflation limit growth gains, but it also leaves the poor worse off and widens the divide between the wealthy and the poor.
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