Editing Inflation (section)

{{Short description|Devaluation of money's purchasing power}}
{{about|a rise in general price level|the expansion of the early universe|Cosmic inflation||Inflation (disambiguation)}}
{{Use mdy dates|date=September 2017}}
{{Macroeconomics sidebar}}
[[File:World inflation rate October 2024.png|thumb|upright=2|Inflation rates among members of the [[International Monetary Fund]] in October 2024]]
[[File:UK and US 1989-present monthly CPI.svg|thumb|upright=2|UK and US monthly inflation rates from January 1989<ref>{{cite web |date=March 2022 |title=Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by expenditure category, March 2022 |url=https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.bls.gov%2Fcpi%2Ftables%2Fsupplemental-files%2Fnews-release-table1-202203.xlsx&wdOrigin=BROWSELINK |access-date=12 March 2022 |website=[[Bureau of Labor Statistics]]}}</ref><ref>{{cite web |date=13 April 2022 |title=CPIH Annual Rate 00: All Items 2015=100 |url=https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23 |access-date=13 April 2022 |website=[[Office for National Statistics]] |archive-date=April 24, 2022 |archive-url=https://web.archive.org/web/20220424051728/https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23 |url-status=live }}</ref>]]

In [[economics]], '''inflation''' is an increase in the average price of goods and services in terms of money.<ref name=Romer>{{Harvnb|Romer|2019}}</ref>{{rp|579}} This increase is measured using a price index, typically a [[consumer price index]] (CPI).<ref>{{citation |title=What Is Inflation? |date=June 8, 2023 |url=https://www.clevelandfed.org/center-for-inflation-research/inflation-101/what-is-inflation-start |access-date=June 8, 2023 |archive-url=https://web.archive.org/web/20210330131140/https://www.clevelandfed.org/our-research/center-for-inflation-research/inflation-101/what-is-inflation-get-started |url-status=dead |publisher=Cleveland Federal Reserve |archive-date=March 30, 2021}}.</ref><ref>{{cite web|url=https://www.bls.gov/bls/inflation.htm|title=Overview of BLS Statistics on Inflation and Prices : U.S. Bureau of Labor Statistics|publisher=Bureau of Labor Statistics|date=June 5, 2019|access-date=November 3, 2021|archive-date=December 10, 2021|archive-url=https://web.archive.org/web/20211210164020/https://www.bls.gov/bls/inflation.htm|url-status=live}}</ref><ref>{{cite news |last1=Salwati |first1=Nasiha |last2=Wessel |first2=David |date=June 28, 2021 |title=How does the government measure inflation? |publisher=Brookings Institution |url=https://www.brookings.edu/blog/up-front/2021/06/28/how-does-the-government-measure-inflation/ |url-status=live |access-date=November 3, 2021 |archive-url=https://web.archive.org/web/20211115162420/https://www.brookings.edu/blog/up-front/2021/06/28/how-does-the-government-measure-inflation/ |archive-date=November 15, 2021}}</ref><ref>{{cite web|url=https://www.federalreserve.gov/faqs/economy_14419.htm|title=The Fed – What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?|website=Board of Governors of the Federal Reserve System|date=September 9, 2016|access-date=November 3, 2021|archive-date=July 17, 2021|archive-url=https://web.archive.org/web/20210717231718/https://www.federalreserve.gov/faqs/economy_14419.htm|url-status=live}}</ref> When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the [[purchasing power]] of money.<ref>[http://www.sedlabanki.is/?PageID=195 Why price stability?] {{webarchive |url=https://web.archive.org/web/20081014031836/http://www.sedlabanki.is/?PageID=195 |date=October 14, 2008}}, Central Bank of Iceland, Accessed on September 11, 2008.</ref><ref>Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Incorporated. P. 429. "The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes that the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements."</ref> The opposite of CPI inflation is [[deflation]], a decrease in the general price level of goods and services. The common measure of inflation is the '''inflation rate''', the annualized percentage change in a general [[price index]].<ref name=Mankiw2002>{{Harvnb|Mankiw|2002}}</ref>{{rp|22–32}}

Changes in inflation are widely attributed to fluctuations in [[Real versus nominal value (economics)|real]] [[demand]] for goods and services (also known as [[demand shock]]s, including changes in [[fiscal policy|fiscal]] or [[monetary policy]]), changes in available supplies such as during [[energy crisis|energy crises]] (also known as [[supply shock]]s), or changes in inflation expectations, which may be self-fulfilling.<ref name="Blanchard">{{Harvnb|Blanchard|2021}}</ref> Moderate inflation affects economies in both positive and negative ways. The negative effects would include an increase in the [[opportunity cost]] of holding money; uncertainty over future inflation, which may discourage investment and savings; and, if inflation were rapid enough, shortages of [[Good (economics)|goods]] as consumers begin [[Hoarding (economics)|hoarding]] out of concern that prices will increase in the future. Positive effects include reducing unemployment due to [[Nominal rigidity|nominal wage rigidity]],<ref name=Mankiw2002/>{{rp|238–255}} allowing the central bank greater freedom in carrying out [[monetary policy]], encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.

Today, most economists favour a low and steady rate of inflation. Low (as opposed to zero or [[Deflation|negative]]) inflation reduces the probability of economic [[recessions]] by enabling the labor market to adjust more quickly in a downturn and reduces the risk that a [[liquidity trap]] prevents [[monetary policy]] from stabilizing the economy while avoiding the costs associated with high inflation.<ref name="aeaweb.org">{{Cite journal |last=Svensson |first=Lars E. O. |date=December 2003 |title=Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others |journal=Journal of Economic Perspectives |language=en |volume=17 |issue=4 |pages=145–166 |doi=10.1257/089533003772034934 |s2cid=17420811 |issn=0895-3309|doi-access=free }}</ref> The task of keeping the rate of inflation low and stable is usually given to [[central bank]]s that control monetary policy, normally through the setting of interest rates and by carrying out [[open market operation]]s.<ref name=Blanchard/>