Is spectre of inflation making a comeback across the world?
Concepts, dynamics and measuring of inflation  Inflation is generally defined as a general rise in prices, often expressed as a percentage; means that a unit of currency effectively buys less than it did in prior periods. In terms of purchasing power, inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising. Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). That depends what stage of the stage of economic growth/recovery cycle a country stands. In early stages of the cycle, moderate levels of inflation boosts demand, growth and employment, until it transforms into demand-pull, cost-push or wage price inflation. Although inflation boosts asset prices in nominal terms, in real terms it is illusory and exchange rate depreciation combined with inflation can be of disastrous consequences to investors holding assets in foreign currencies that are vulnerable. An increase in the supply of money is the root cause of inflation, though this can play out through different mechanisms in the economy. Money supply can be increased by the monetary authorities either by printing and giving away more money to the individuals, by legally devaluing currency, more (most commonly) by loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market. In all such cases of money supply increase, the money loses its purchasing power. Demand-pull inflation  Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises. Cost-Push Effect  Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into commodity or other asset markets and especially when this is accompanied by a negative economic shock to the supply of key commodity, costs for all kind of intermediate goods rise. These developments lead to higher cost for the finished product or service and work their way into rising consumer prices. Built-in Inflation  Built-in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, workers and others come to expect that they will continue to rise in the future at a similar rate and demand more costs/wages to maintain their standard of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa. Measuring of inflation  Inflation is measured using varying benchmarks. Depending upon the selected set of goods and services used, multiple types of baskets of goods are calculated and tracked as price indexes. Most commonly used price indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). The Consumer Price Index  The CPI is a measure that examines the weighted average of prices of a basket of goods and services, which are of primary consumer needs. They include transportation, food, and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by individuals. Changes in the CPI are used to assess price changes associated with the cost of living, making it one of the most frequently used statistics for identifying periods of inflation or deflation. The Wholesale Price Index  The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level. While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing. Although many countries and organizations use WPI, many other countries, including the U.S., use a similar variant called the producer price index (PPI). The Producer Price Index  The producer price index is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time. The PPI measures price changes from the perspective of the seller and differs from the CPI, which measures price changes from the perspective of the buyer. Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. Food and energy are necessary staples, meaning demand for them does not change much even as prices rise. Inflation expectation is simply the rate at which peopleconsumers, businesses, investorsexpect prices to rise in the future. They matter because actual inflation depends, in part, on what people expect it to be. If everyone expects prices to rise, say, 3 per cent over the next year, businesses will want to raise prices by (at least) 3 per cent, and workers will want similar-sized raises. If inflation expectations rise by one percentage point, actual inflation will tend to rise by one percentage point as well. Inflation expectations is very important for setting monetary policy. Central banks aim to achieve maximum sustainable employment and price stability. Inflation targeting is based on anchoring inflation expectations on a pre-set target.