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The guide to the concept of inflation

The concept of economic inflation at first glance may seem quite familiar to most people as it can be heard frequently in all media, and yet most people do not know the true meaning of the concept of economic inflation, which is one of the most important things in the financial markets.

If you want to learn about this concept and its importance in the financial markets, simply read with us to learn everything you want in this comprehensive guide.

What is economic inflation?

Inflationary is a term that indicates a widespread rise in the prices of goods, services, and components, which results in a decline in the purchasing power of the country’s currency at the same time, not as defined by the Central Bank. In the market economy, prices for goods and services are constantly changing. Some prices go up, others go down.

So when we talk about inflation, we talk about price increases, and as a result, fewer goods and services can be purchased for one unit of a country’s currency. In other words, the value of one currency is lower than before inflation.

For this reason, increased inflation will directly affect:

Individuals’ purchasing power

Total personnel costs

How is the rate of economic inflation calculated?

Inflation is calculated in different ways depending on the types of goods and services involved.

The Consumer Price Index (CPI) is the most common indicator for calculating economic inflation, but there are other indicators to measure price growth, such as the product price index.

But other indicators to calculate inflation. Regardless of what the indicator provides, it is much less used, and let’s look at other indicators in detail:

Consumer Price Index

This indicator measures the percentage change in the prices of the basket of goods and services often used by households, as this economic indicator is widely used to calculate inflation in most countries around the world.

Certainly, there may be differences in the basket against which the indicator is calculated.

You can often find the term underlying inflation, which generally refers to a basket of goods and services except for food and energy products. Besides core inflation, you can also find the main inflation, which illustrates price growth in the entire consumer basket.

Producer Price Index

The PPI is a measure of inflation, consisting of a set of indicators that measure the average change in sales prices from local producers of goods and services over time. This index measures price changes from the seller’s rather than the buyer’s point of view, as in the consumer price index.

Using this indicator to calculate economic inflation, an increase in the price of an ingredient, such as oil, could eliminate the decline of some other ingredients, such as wheat and maize. In general… Each indicator indicates the weighted average inflation of certain components such as sector or commodity.

Types of economic inflation

Slow inflation

Prices increase by 3% or less annually.

Consumers expect prices to continue rising as they buy now as demand increases.

This type is considered positive for economic growth.

According to US Federal Reserve statistics, slow inflation occurs when prices rise 2% or less.

Economic growth benefits from this type of inflation.

Accelerated inflation

Prices rise by 3% -10% annually.

Consumers start buying more than their need to avoid future price hikes.

Demand is too high for suppliers to respond.

Wages cannot support demand and many goods and services are beyond consumers’ reach.

It could hurt the economy because it’s rising so fast.

Inflation

With inflation soaring above 10%, the economy is in chaos.

Money starts losing value very quickly.

The population’s income becomes inconsistent with their expenses.

Foreign investors begin to avoid the country where this momentum occurs.

Trust in political leaders begins to decline rapidly.

It is important to prevent access to hyperinflation at all costs.

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