- Unexpected
inflation imposes costs on many people and benefits others because
it arbitrarily redistributes purchasing power. Inflation can reduce
the growth of national living standards because individuals and organizations
use resources to protect themselves against the uncertainty of future
prices. Some aspects of inflation can be addressed with public policies,
although there are disagreements among political parties as to what
policies are most adequate.
- Inflation
is a sustained increase in the average price level. Deflation is a
sustained decrease in the average price level.
- Inflation
reduces the purchasing power of money. When people's incomes increase
more slowly than the inflation rate, the purchasing power of their
income declines.
- The
Consumer Price Index (CPI) is the most commonly used measure of price-level
changes. It can be used to compare the price level in one year with
price levels in earlier or later periods.
- Expectations
of inflation may lead to higher interest rates.
- The
costs of inflation are different for different groups of people. Unexpected
inflation hurts savers and people on fixed incomes; it helps people
who have borrowed money at a fixed interest rate.
- Inflation
imposes costs on people beyond its effects on wealth distribution
because people devote resources to protect themselves from its expected
inflation.
- In
the long run, inflation results from increases in the nation's money
supply that exceed increases in its output of goods and services.
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