In mainstreamecono mics, the word \u201cinflation\u201d refers to a general rise in prices measured
against a standard level of purchasing power. Previously the term was used to refer to an
increase in the money supply, which is now referred to as expansionary monetary policy
or monetary inflation. Cash inflation is measured by comparing two sets of identical non-
monetary items at two points in time, and computing the increase in nominal cost not
reflected by an increase in quality. There are, therefore, many measures of cash inflation
depending on the specific circumstances. The most well known are theCPI which
measures the change in nominal consumer prices, and the GDP deflator, which measures
inflation in new products and services created.
The prevailing view in mainstream economics is that inflation is caused by the interaction
of the supply ofmone y with output and interest rates. Mainstream economist views can
be broadly divided into two camps: the "monetarists" who believe that monetary effects
dominate all others in setting the rate of inflation, and the "Keynesians" who believe that
the interaction of money, interest and output dominate over other effects. Keynesians also
tend to add a capital goods (or asset) price inflation to the standard measure of
consumption goods inflation. Other theories, such as those of the Austrian school of
In classical political economy, \u201cinflation\u201d referred to government policy itself: inflation
meant increasing the money supply over and above that necessary to accommodate any
increase in real GDP, while \u201cdeflation\u201d meant decreasing it. Some economists in a few
schools of economic thought, generally described as libertarian, classical liberal, or ultra-
conservative, still retain this usage. In mainstream economic terms these would be
referred to as expansionary and contractionary monetary policies.
Measuring inflation is a question ofecono metrics, finding objective ways of comparing
nominal prices to real activity. In many places in economics, "real" variables need to be
compared. For example, in order to calculate GDP, effective interest rate and
improvements in productivity are the "real variables" used in the calculations. Each
inflationary measure takes a "basket" of goods and services, then the prices of the items
in the basket are compared to a previous time, then adjustments are made for the changes
in the goods in the basket itself. For example, a month ago canned corn was sold in 10 oz.
jars for $9, and this month it is sold for $10. Assuming the quality of the product does not
change, (ie a different metal in the can, a new type of corn,) the resulting price change is
attributed to inflation. Economists analyze the aforementioned factors when calculating
inflation for a product. For example, if that same can of corn was sold in 9 oz. jars for $9,
and this month is sold in 10 oz jars for $10, and there are no other economic factors, then
an economist would analyze the product as undergoing no inflation.
This differs from the CPI in that price subsidization, profits, and taxes may cause
the amount received by the producer to differ from what the consumer paid. There
is also typically a delay between an increase in the PPI and any resulting increase
in the CPI. Producer price inflation measures the pressure being put on producers
by the costs of their raw materials. This could be "passed on" as consumer
inflation, or it could be absorbed by profits, or offset by increasing productivity.
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