informative essay about inflation

What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far  today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

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Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

• Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage  in the supply of semiconductors  made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
• Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply  during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales  Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted  by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust  in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down  the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

• Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
• Companies lose purchasing power, and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that it suppresses demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT  (adjust, develop, accelerate, plan, and track) to inflation:

• Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
• Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
• Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
• Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
• Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Growth, Marketing & Sales , Industrials & Electronics , Operations , and Strategy & Corporate Finance  Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

• Design. Leaders should motivate their organizations to raise the profile of design  to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
• Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
• Procurement. CEOs who empower their procurement  organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
• Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
• Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
• Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey  expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights  collection. Learn more about Operations consulting , and check out operations-related job opportunities  if you’re interested in working at McKinsey.

Articles referenced:

• “ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
• “ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
• “ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
• “ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhardt and Rosen Kotsev
• “ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm  
• “ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, André Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
• “ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
• “ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
• “ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
• “ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
• “ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
• “ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
• “ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
• “ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt ,  Axel Karlsson , Tarek Kasah, and  Daniel Swan
• “ Five ways to ADAPT pricing to inflation ,” February 25, 2022,  Alex Abdelnour , Eric Bykowsky, Jesse Nading,  Emily Reasor , and Ankit Sood
• “ How COVID-19 is reshaping supply chains ,” November 23, 2021,  Knut Alicke ,  Ed Barriball , and Vera Trautwein
• “ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021,  Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and  Fernando Perez
• “ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021,  Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

Want to know more about inflation?

Related articles.

What is supply chain?

How business operations can respond to price increases: A CEO guide

Five ways to ADAPT pricing to inflation

Economic essays on inflation

• Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level.
• Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply.

• Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment.

• Problems measuring inflation – why it can be hard to measure inflation with changing goods.
• Different types of inflation – cost-push inflation, demand-pull inflation, wage-price spiral,
• How to solve inflation . Policies to reduce inflation, including monetary policy, fiscal policy and supply-side policies.
• Trade off between inflation and unemployment . Is there a trade-off between the two, as Phillips Curve suggests?
• The relationship between inflation and the exchange rate – Why high inflation can lead to a depreciation in the exchange rate.
• What should the inflation target be? – Why do government typically target inflation of 2%
• Deflation – why falling prices can lead to negative economic growth.
• Monetarist Theory – Monetarist theory of inflation emphasises the role of the money supply.
• Criticisms of Monetarism – A look at whether the monetarist theory holds up to real-world scenarios.
• Money Supply   – What the money supply is.
• Can we have economic growth without inflation?
• Predicting inflation
• Link between inflation and interest rates
• Should low inflation be the primary macroeconomic objective?

See also notes on Unemployment

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Finance & Development

Inflation: Prices on the Rise

Back to Basics

Credit: ISTOCK / RASTUDIO

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BACK TO BASICS COMPILATION

Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year

It may be one of the most familiar words in economics. Inflation has plunged countries into long periods of instability. Central bankers often aspire to be known as “inflation hawks.” Politicians have won elections with promises to combat inflation, only to lose power after failing to do so. Inflation was even declared Public Enemy No. 1 in the United States—by President Gerald Ford in 1974. What, then, is inflation, and why is it so important?

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

Measuring inflation

Consumers’ cost of living depends on the prices of many goods and services and the share of each in the household budget. To measure the average consumer’s cost of living, government agencies conduct household surveys to identify a basket of commonly purchased items and track over time the cost of purchasing this basket. (Housing expenses, including rent and mortgages, constitute the largest component of the consumer basket in the United States.) The cost of this basket at a given time expressed relative to a base year is the  consumer price index  (CPI), and the percentage change in the CPI over a certain period is  consumer price inflation , the most widely used measure of inflation. (For example, if the base year CPI is 100 and the current CPI is 110, inflation is 10 percent over the period.)

Core consumer inflation  focuses on the underlying and persistent trends in inflation by excluding prices set by the government and the more volatile prices of products, such as food and energy, most affected by seasonal factors or temporary supply conditions. Core inflation is also watched closely by policymakers. Calculation of an overall inflation rate—for a country, say, and not just for consumers—requires an index with broader coverage, such as the  GDP deflator .

The CPI basket is mostly kept constant over time for consistency, but is tweaked occasionally to reflect changing consumption patterns—for example, to include new hi-tech goods and to replace items no longer widely purchased. Because it shows how, on average, prices change over time for everything produced in an economy, the contents of the GDP deflator vary each year and are more current than the mostly fixed CPI basket. On the other hand, the deflator includes nonconsumer items (such as military spending) and is therefore not a good measure of the cost of living.

The good and the bad

To the extent that households’  nominal  income, which they receive in current money, does not increase as much as prices, they are worse off, because they can afford to purchase less. In other words, their  purchasing power  or  real —inflation-adjusted—income falls. Real income is a proxy for the standard of living. When real incomes are rising, so is the standard of living, and vice versa.

In reality, prices change at different paces. Some, such as the prices of traded commodities, change every day; others, such as wages established by contracts, take longer to adjust (or are “sticky,” in economic parlance). In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation.

Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates. Take pensioners who receive a fixed 5 percent yearly increase to their pension. If inflation is higher than 5 percent, a pensioner’s purchasing power falls. On the other hand, a borrower who pays a fixed-rate mortgage of 5 percent would benefit from 5 percent inflation, because the  real interest rate  (the nominal rate minus the inflation rate) would be zero; servicing this debt would be even easier if inflation were higher, as long as the borrower’s income keeps up with inflation. The lender’s real income, of course, suffers. To the extent that inflation is not factored into  nominal interest rates , some gain and some lose purchasing power.

Indeed, many countries have grappled with high inflation—and in some cases  hyperinflation , 1,000 percent or more a year. In 2008, Zimbabwe experienced one of the worst cases of hyperinflation ever, with estimated annual inflation at one point of 500 billion percent. Such high levels of inflation have been disastrous, and countries have had to take difficult and painful policy measures to bring inflation back to reasonable levels, sometimes by giving up their national currency, as Zimbabwe has.

Although high inflation hurts an economy,  deflation , or falling prices, is not desirable either. When prices are falling, consumers delay making purchases if they can, anticipating lower prices in the future. For the economy this means less economic activity, less income generated by producers, and lower economic growth. Japan is one country with a long period of nearly no economic growth, largely because of deflation. Preventing deflation during the global financial crisis that began in 2007 was one of the reasons the US Federal Reserve and other central banks around the world kept interest rates low for a prolonged period and have instituted other monetary policies to ensure financial systems have plenty of liquidity.

Most economists now believe that low, stable, and—most important—predictable inflation is good for an economy. If inflation is low and predictable, it is easier to capture it in price-adjustment contracts and interest rates, reducing its distortionary impact. Moreover, knowing that prices will be slightly higher in the future gives consumers an incentive to make purchases sooner, which boosts economic activity. Many central bankers have made their primary policy objective maintaining low and stable inflation, a policy called  inflation targeting .

What creates inflation?

Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise. This relationship between the money supply and the size of the economy is called the  quantity theory of money  and is one of the oldest hypotheses in economics.

Pressures on the supply or demand side of the economy can also be inflationary.  Supply shocks  that disrupt production, such as natural disasters, or raise production costs, such as high oil prices, can reduce overall supply and lead to “cost-push” inflation, in which the impetus for price increases comes from a disruption to supply. The food and fuel inflation of 2008 was such a case for the global economy—sharply rising food and fuel prices were transmitted from country to country by trade. Conversely,  demand shocks , such as a stock market rally, or  expansionary policies , such as when a central bank lowers interest rates or a government raises spending, can temporarily boost overall demand and economic growth. If, however, this increase in demand exceeds an economy’s production capacity, the resulting strain on resources is reflected in “demand-pull” inflation. Policymakers must find the right balance between boosting demand and growth when needed without overstimulating the economy and causing inflation.

Expectations  also play a key role in determining inflation. If people or firms anticipate higher prices, they build these expectations into wage negotiations and contractual price adjustments (such as automatic rent increases). This behavior partly determines the next period’s inflation; once the contracts are exercised and wages or prices rise as agreed, expectations become self-fulfilling. And to the extent that people base their expectations on the recent past, inflation would follow similar patterns over time, resulting in inflation  inertia .

How policymakers deal with inflation

The right set of  disinflationary policies , those aimed at reducing inflation, depends on the causes of inflation. If the economy has overheated, central banks—if they are committed to ensuring price stability—can implement  contractionary  policies that rein in aggregate demand, usually by raising interest rates. Some central bankers have chosen, with varying degrees of success, to impose monetary discipline by  fixing the exchange rate —tying the value of its currency to that of another currency, and thereby its monetary policy to that of another country. However, when inflation is driven by global rather than domestic developments, such policies may not help. In 2008, when inflation rose across the globe on the back of high food and fuel prices, many countries allowed the high global prices to pass through to the domestic economy. In some cases the government may directly set prices (as some did in 2008 to prevent high food and fuel prices from passing through). Such  administrative price-setting  measures usually result in the government’s accrual of large subsidy bills to compensate producers for lost income.

Central bankers are increasingly relying on their ability to influence  inflation expectations  as an inflation-reduction tool. Policymakers announce their intention to keep economic activity low temporarily to bring down inflation, hoping to influence expectations and contracts’ built-in inflation component. The more credibility central banks have, the greater the influence of their pronouncements on inflation expectations.

Ceyda Oner is a deputy division chief in the IMF’s Finance Department.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

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A $550 Million Loaf of Bread?

If you were born within the last three decades in the United States, Canada, or many other countries in the developed world, you probably have no real experience with a high rate of inflation. Inflation is when most prices in an entire economy are rising. But there is an extreme form of inflation called hyperinflation. This occurred in Germany between 1921 and 1928, and more recently in Zimbabwe between 2008 and 2009. In November of 2008, Zimbabwe had an inflation rate of 79.6 billion percent. In contrast, in 2014, the United States had an average annual rate of inflation of 1.6%.

Zimbabwe’s inflation rate was so high it is difficult to comprehend. So, let’s put it into context. It is equivalent to price increases of 98% per day. This means that, from one day to the next, prices essentially double. What is life like in an economy afflicted with hyperinflation? Not like anything you are familiar with. Prices for commodities in Zimbabwean dollars were adjusted several times each day . There was no desire to hold on to currency since it lost value by the minute. The people there spent a great deal of time getting rid of any cash they acquired by purchasing whatever food or other commodities they could find. At one point, a loaf of bread cost 550 million Zimbabwean dollars. Teachers were paid in the trillions a month; however this was equivalent to only one U.S. dollar a day. At its height, it took 621,984,228 Zimbabwean dollars to purchase one U.S. dollar.

Government agencies had no money to pay their workers so they started printing money to pay their bills rather than raising taxes. Rising prices caused the government to enact price controls on private businesses, which led to shortages and the emergence of black markets. In 2009, the country abandoned its currency and allowed foreign currencies to be used for purchases.

How does this happen? How can both government and the economy fail to function at the most basic level? Before we consider these extreme cases of hyperinflation, let’s first look at inflation itself.

Chapter Objectives

Introduction to Inflation

In this chapter, you will learn about:

• Tracking Inflation
• How Changes in the Cost of Living are Measured
• How the U.S. and Other Countries Experience Inflation
• The Confusion Over Inflation
• Indexing and Its Limitations

Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation does not refer to a change in relative prices. A relative price change occurs when you see that the price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means that there is pressure for prices to rise in most markets in the economy. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped—well, then it would not be inflation any more.

This chapter begins by showing how to combine prices of individual goods and services to create a measure of overall inflation. It discusses the historical and recent experience of inflation, both in the United States and in other countries around the world. Other chapters have sometimes included a note under an exhibit or a parenthetical reminder in the text saying that the numbers have been adjusted for inflation. In this chapter, it is time to show how to use inflation statistics to adjust other economic variables, so that you can tell how much of, say, the rise in GDP over different periods of time can be attributed to an actual increase in the production of goods and services and how much should be attributed to the fact that prices for most things have risen.

Inflation has consequences for people and firms throughout the economy, in their roles as lenders and borrowers, wage-earners, taxpayers, and consumers. The chapter concludes with a discussion of some imperfections and biases in the inflation statistics, and a preview of policies for fighting inflation that will be discussed in other chapters.

Principles of Economics Copyright © 2023 by Waleed Muhammad / Hajlatech LLC. All Rights Reserved.

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Understanding the Recent Behavior of Inflation

For the last two years, inflation has been high, well above the Federal Reserve’s 2% annual target. High inflation has been persistent and widespread—the result of both supply and demand factors associated with the COVID-19 pandemic, including the fiscal and monetary policies that were implemented in response. For previous work on this subject, see my blog posts “ 2021: The Year of High Inflation ” (April 12, 2022) and “ Inflation Is Still High and Widespread ” (Oct. 17, 2022). This post is the first in a two-part series that will analyze the behavior of inflation and the impact of fiscal and monetary policies during this episode, and provide a plausible outlook for the near future.

Aggregate Prices and Inflation

Inflation is the change in the price level over a period of time. The Federal Reserve’s preferred measure for the price level is the personal consumption expenditures (PCE) price index, as published by the Bureau of Economic Analysis—essentially, the average price of the consumption component of gross domestic output.

The first figure shows the monthly evolution of the PCE price index since January 2016 until March 2023, the latest data available. It also plots two alternative measures: an index that excludes energy prices and an index that excludes food and energy prices (known as core PCE). Energy prices are largely determined by oil and gas, which are internationally traded commodities whose costs reflect global factors. Although a small component of consumption expenditures (about 4%), energy prices are very volatile and thus drive movements in the average price level that may give a misleading impression of what is happening with prices in general. For somewhat similar reasons, food prices (about 8% of total consumption expenditures) are also removed to then create the core price index, which is often cited along with the “headline” index, which includes all goods and services. However, in recent times, food prices have been less volatile and their behavior during the pandemic more aligned with other prices. Thus, an index that removes only energy prices might be more informative of underlying domestic factors. There are many alternative measures of underlying or trend inflation. For a recent take, see Kevin Kliesen’s April 18, 2023, Economic Synopses essay, “ Measures of ‘Trend’ Inflation .”

PCE Price Indexes

SOURCES: Bureau of Economic Analysis and Haver Analytics.

In the period prior to the COVID-19 pandemic, prices were growing at an average annual rate of 1.8%, slightly below the Federal Reserve’s 2% target. This growth process, which we call inflation, was arrested at the onset of the pandemic and resumed toward the end of 2020, though at a significantly faster rate. We can see that energy prices played an important role in this period, as the acceleration and subsequent deceleration in inflation were less pronounced once we excluded them. The index excluding energy and food and the index excluding energy show a steadier, more consistent increase.

The second figure shows inflation rates, measured as the 12-month change in the corresponding price index. For all three indexes considered, annual inflation has persistently exceeded 2% since March 2021. This figure shows clearly how energy contributed to inflation dynamics. However, when we exclude energy prices, inflation is still very high, staying over 5% annually for all of 2022 and just under 5% in March 2023. When looking at core PCE, i.e., excluding both food and energy, there is a modest moderation in inflation from its peak, but it is much less pronounced than with headline inflation.

Annualized PCE Inflation Rates

The first table provides a summary of inflation rates over various periods of interest. The first, 2016-19, covers the years immediately prior to the pandemic, when inflation was close to the Federal Reserve’s 2% target. Next are the years 2020, 2021 and 2022. Finally, the period labeled “COVID-19” covers the whole pandemic period, between March 2020 and March 2023. All inflation rates are annualized to make them comparable across periods of different lengths.

The table highlights how inflation accelerated in 2021 and 2022. Overall, the aggregate price level rose at an average annual rate of 4.3% since the start of the COVID-19 pandemic. This rate moderates to 4.1% annually when we exclude energy prices and 3.9% annually when we exclude both food and energy prices. These rates are between 2.1 and 2.5 percentage points higher than the pre-pandemic period and well in excess of the Federal Reserve’s 2% target.

Breaking Down Inflation

The second table decomposes inflation excluding energy into four big categories: food, core goods, core services excluding housing, and housing. The contribution of these components in total consumption expenditures is, roughly, 8%, 22%, 50% and 16%, respectively (the remaining 4% reflects expenditures in energy goods and services).

The behavior of these components was very different during the pre-pandemic period: Food experienced almost no inflation, core goods prices were actually declining (mostly driven by durables), while core services excluding housing and housing were both growing above the Federal Reserve’s target rate. The pandemic changed these trends: Since 2021, all components have been growing at rates higher than 2% annually. For the overall pandemic period, food experienced the fastest inflation rate (6.6% annually), followed by housing (4.8% annually). In recent communications, Fed Chair Jerome Powell has identified the category “core services excluding housing” as key in understanding inflation dynamics. As Powell explained in his Nov. 30, 2022, speech, the reason is that “ wages make up the largest cost in delivering these services .” Inflation in this category has largely behaved the same as for the core price index and remains well above 2%.

Components of the PCE Price Index Excluding Energy

Above, the third figure shows the evolution of prices of the main components discussed earlier.

Notably, the price of core goods seems to have stabilized during the second half of 2022, while inflation in food prices has decelerated markedly over the same period. In contrast, the rate at which the price of core services excluding housing is increasing shows no signs of slowing down. Similarly, housing services actually experienced a significant acceleration in inflation in 2022. It is well understood that housing prices tend to lag other prices, This is because rents are renewed infrequently (e.g., once a year) and because owner-occupied housing prices are also measured largely using rent data. so the most recent observations may reflect this lag rather than a current trend. Even if this were the case, core services excluding housing—which account for half of consumption expenditures—continue to rise steadily and are a major contributor to overall inflation.

Inflation Is Widespread

We can further analyze inflation across individual product categories by computing their annualized price change and expenditure share in each period. The fourth figure estimates the distribution of inflation across product categories, with annualized price changes on the horizontal axes and the corresponding expenditure shares on the vertical axes. The disaggregated data published by the Bureau of Economic Analysis consist of 244 product categories with monthly series on expenditures, prices and real quantities. There is some double counting in the report, so the actual number of product categories is slightly smaller. See NIPA tables 2.4.4U, 2.4.5U and 2.4.6U. For a full description of the methodology, see my blog post “ How Widespread Are Price Increases in the U.S.? ” (Oct. 19, 2021). I considered two periods: the pre-pandemic period (2016-19) and the COVID-19 period (March 2020 to March 2023). Focusing on the COVID-19 period as a whole removes the effects of temporary surges in prices and provides a better overall picture.

Estimated Distribution of PCE Inflation

SOURCES: Bureau of Economic Analysis and author’s calculations.

NOTES: Distributions are computed with kernel density estimation in Stata, using the optimal bandwidth for each period. The COVID-19 period covers March 2020 to March 2023.

The pandemic has shifted the distribution of inflation to the right. That is, during the COVID-19 period, a larger share of consumption expenditures were on products that experienced higher inflation rates than in the pre-pandemic years. The current high inflation episode is a widespread phenomenon and not the result of a few outliers.

The distribution of inflation across product categories also highlights several important differences between the pre-pandemic and COVID-19 periods. From 2016 to 2019, 18% of consumption expenditures were on products experiencing negative inflation; this proportion drops to less than 1% in the COVID-19 period. Conversely, the share of expenditures on products experiencing more than 5% annual inflation was only 5% in the pre-pandemic period and rose to over 40% during the COVID-19 period. These are significant changes that help us understand the nature of the current high inflation.

In my next post , I’ll examine the impact of fiscal and monetary policies during this inflationary episode and provide a plausible outlook for the near future.

• For previous work on this subject, see my blog posts “ 2021: The Year of High Inflation ” (April 12, 2022) and “ Inflation Is Still High and Widespread ” (Oct. 17, 2022).
• There are many alternative measures of underlying or trend inflation. For a recent take, see Kevin Kliesen’s April 18, 2023, Economic Synopses essay, “ Measures of ‘Trend’ Inflation .”
• As Powell explained in his Nov. 30, 2022, speech, the reason is that “ wages make up the largest cost in delivering these services .”
• This is because rents are renewed infrequently (e.g., once a year) and because owner-occupied housing prices are also measured largely using rent data.
• The disaggregated data published by the Bureau of Economic Analysis consist of 244 product categories with monthly series on expenditures, prices and real quantities. There is some double counting in the report, so the actual number of product categories is slightly smaller. See NIPA tables 2.4.4U, 2.4.5U and 2.4.6U. For a full description of the methodology, see my blog post “ How Widespread Are Price Increases in the U.S.? ” (Oct. 19, 2021).

Fernando M. Martin is an economist and senior economic policy advisor at the Federal Reserve Bank of St. Louis. His research interests include macroeconomics, monetary economics, banking and public finance. He joined the St. Louis Fed in 2011. Read more about his work .

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Why We Care About Inflation

President, Federal Reserve Bank of Richmond

Cecil County Chamber of Commerce Elkton, Md.

Highlights:

• Since the mid-'90s, inflation has been low and stable. But no one is forgetting inflation today. At first, inflationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the inflationary news just keeps coming.
• All of this has depressed consumer sentiment, and business sentiment has fallen too. So, we need to get inflation under control.
• I see inflation coming down on two paths. A number of these pandemic-era pressures will eventually settle. At the same time, interest rates will impact demand and expectations. And, as we act, we send messages to consumers and firms that will manage their expectations for future inflation. All this will take a little time, but make no mistake, we are on the case.

It’s great to be with you in person today — and thank you to Debbie and Sharon for inviting me and that nice introduction. I want to spend today talking about inflation. These are my views alone and not those of any of my colleagues on the FOMC or in the Federal Reserve System.

I grew up in the ‘60s and ‘70s — an era when inflation emerged and then became omnipresent and painful. A wage and price freeze left supermarket shelves bare. Twin oil crises led to panic at the pump. President Ford issued Whip Inflation Now buttons. You couldn’t go anywhere without hearing the Bee Gees — it was a tough time. By the mid-‘70s, core Personal Consumption Expenditure (PCE) inflation reached 10.2 percent — nearly twice as high as what it is today.  

But in the early ‘80s, the Fed under Paul Volcker actually did whip inflation. Of course, things got bad before they got better — it was the ultimate hard landing: Unemployment reached nearly 11 percent in 1982. The economy fell into not one, but two recessions. But since the mid-‘90s, inflation has been low and stable. And the Fed learned a hard lesson: the role inflation targeting plays in delivering anchored inflation expectations, thereby creating a healthy foundation for the economy. 

I have a theory that memory matters. Recessions happen every 8-10 years because that’s how long it takes for a leadership team to rotate, believe they know better and then repeat the errors of their predecessors. Real estate lenders overreach every 15-20 years (1970s, 1990s, 2000s) as credit officers turn over and memories fade. The Roaring ‘20s, the Go-Go ‘60s and the internet bubble of the early 2000s perhaps demonstrated that market memories only last 30-40 years. And after 30 years of price stability, maybe the same thing happened with inflation. Prior to the pandemic, the focus was on how to move inflation up, not down. The Phillips curve came into question. Virtually no professional forecaster predicted the high, persistent inflation we’ve been experiencing.

Well, no one is forgetting inflation today. The most recent Consumer Price Index is 8.5 percent. The headline PCE, our preferred metric, is 6.6 percent. Core PCE is at 5.2 percent. Demand is strong and looks to remain robust, fueled by healthy business and personal balance sheets, the need to replenish low inventories and state governments that are flush with cash. Supply chains have been overwhelmed, and suppliers are struggling to bring them back into balance. Labor markets are also tight: Unemployment has dropped to 3.6 percent. In addition, the pool of available labor has shrunk: 1.2 million fewer workers are in the workforce, and immigration remains well below its pre-COVID-19 trend. 1 As a result, price pressures are everywhere. Inflation is high, persistent and broad-based.

At first, inflationary pressures seemed temporary, driven by pandemic reopening or supply chain challenges like chips in cars. But the inflationary news just keeps coming, whether it is a severe winter storm in Texas, a fire at a chip plant in Japan, a ship lodged in the Suez Canal or a backlog in Long Beach. And, of course, most recently, we’ve seen commodity price shocks coming out of the conflict in Ukraine and new lockdowns in China. These have made inflation the headline of the day — as of May 1, the Wall Street Journal has had an inflation story on its front page 25 times this year. And on social media, a widely shared post jokes that in 2020 we couldn’t leave the house because of COVID-19; now, we can’t leave because of skyrocketing gas prices.

All of this has depressed consumer sentiment. In the most recent Michigan Survey, the overall index of consumer sentiment (April - 65.2) was at levels last seen in the aftermath of the Great Recession and is below where it was at the height of pandemic lockdowns. That is remarkable given the strength of the economy and the job market. But sentiment is being driven heavily by inflation. Respondents expect the year-ahead inflation rate to remain high at 5.4 percent. The last two months have had the highest expectations since 1981. Thirty-eight percent say they’re in a worse financial position than they were a year ago. Buying conditions for purchasing a car, a house or an appliance are at their lowest levels since the early ‘80s. 2

Business sentiment has fallen too. In the Richmond Fed’s most recent CFO Survey (conducted in partnership with Duke and the Atlanta Fed), optimism about the U.S. economy dropped nearly 6 points from the fourth quarter of 2021. CFOs cited cost pressures and inflation as their top concerns. When looking at small-business owners, optimism is even lower. In March, owners who expect better business conditions over the next six months dropped to the lowest level in the survey’s history. Like the CFOs we surveyed, inflation was their top business problem.

We now remember that people thoroughly dislike inflation. Workers who feel they have earned their wage gains feel arbitrarily pinched at the gas pump. Homeowners like their sale price but can’t believe their purchase price. Businesses work to capture value through pricing but feel they’re being taken advantage of by suppliers. They feel powerless in the face of cost increases that tax their revenues, earnings and appreciation they have worked to achieve. 

Why do people hate inflation? Well, no one likes to deal with change, and we haven’t had to think about inflation for over a generation. And no one remembers the ‘70s fondly. Inflation creates uncertainty — as prices rise unevenly across sectors and over time, it becomes unclear when is the right time to spend versus save and where to invest. Inflation is also inherently redistributive — in the ‘70s, those who owned a house with a cheap mortgage benefitted; those on fixed incomes didn’t. Those who had wages indexed to inflation did better than those who didn’t. And inflation adds to your workload. It takes effort to shop around for better prices. Businesses have to handle complaints from unhappy customers, negotiate with insistent suppliers and address any resulting margin pressure. Finally, Robert Shiller taught us that people feel inflation erodes their standard of living by diminishing their buying power, whether it raises their nominal income or not. Higher prices mean you can buy less.

The pain of inflation tends to hit low- and fixed-income populations the most. Low-income households dedicate a higher percentage of their wages to consumption than those with higher incomes. There are estimates that the average U.S. household will have to spend over $5,000 more this year compared to last year for the same consumption basket, and that impacts those who have a tighter monthly budget.

To be clear, not everyone loses with inflation. We have sectors where nominal wages are up well in excess of inflation, like leisure and hospitality. We have a lot of homeowners whose houses are worth much more than they could have imagined. And a number of firms reported record profits last year. But it doesn’t matter — everyone hates inflation.

So, we need to get inflation under control. Congress has given us this mandate. And it’s time.

We can’t do much about short-term price surges. Think of it like the aftermath of a hurricane. Lumber prices increase temporarily as demand spikes for materials to make necessary repairs. Raising rates wouldn’t lower lumber prices when people need to rebuild their homes. Instead, when supply catches up to demand, these price movements reverse themselves.

But in the medium term, our moves matter. So, we have begun a tightening process. We raised interest rates 25 basis points in March and then another 50 basis points in May. We also announced our plans to reduce our balance sheet, starting on June 1. During his press conference, Chair Powell noted that additional 50 basis point increases could be on the table in coming meetings as we work to normalize rates.

We will do what we need to do to contain inflation. But how exactly will our rate moves do that? I see inflation coming down on two paths. A number of these pandemic-era pressures will eventually settle. Chips will finally get into cars, and car prices will come down. Labor force participation will continue to rise as COVID-19 eases. Ports will open up as consumers rotate back from goods to services. At the same time, interest rates will impact demand and expectations. Borrowing rates have already risen, and that will affect investment levels and spending on interest-sensitive items like houses and cars. And, as we act, we send messages to consumers and firms that will manage their expectations for future inflation. All of this will take a little time, but make no mistake, we are on the case.

You might ask if this path requires a Volcker-like recession. Not necessarily. At 83 basis points, we are still far from the level of interest rates that constrains the economy; for my colleagues on the FOMC, this neutral rate is in the range of 2-3 percent. And before the Great Recession, the economy handled rates even higher than that. Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not.

Inflation is high. It has real costs to both individuals and businesses. By contrast, getting inflation closer to the target rate creates the certainty that enables growth and supports maximum employment. That’s why we care, and that’s why we are tackling it.

This reflects the difference in total nonfarm payroll employment between February 2020 and April 2022. Bureau of Labor Statistics via Haver Analytics.

Buying conditions for purchasing a house and large household goods are at their lowest levels since the early 1980s. Buying conditions for purchasing a car are at their lowest levels on monthly records dating back to 1978.

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Essay on Inflation: Meaning, Measurement and Causes

Let us make in-depth study of the meaning, measurement and causes of inflation.

Meaning of Inflation:

By inflation we mean a general rise in prices. To be more correct, inflation is a persistent rise in general price level rather than a once-for-all rise in it.

Rate of inflation is either measured by the percentage change in wholesale price index number (WPI) over a period or by percentage change in consumer price index number (CPI).

Opinion surveys conducted in India and the United States reveal that inflation is the most important concern of the people as it affects their standard of living adversely A high rate of inflation erodes the real incomes of the people. A high rate of infla­tion makes the life of the poor people miserable. It is therefore described as anti-poor, inflation redistributes income and wealth in favour of the rich.

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Thus, it makes the rich richer and the poor poorer. Above all, a high rate inflation adversely effects output and encourages investment in unproductive channels such as purchase of gold, silver, jewellery and real estate. Therefore, it adversely affects long-run economic growth, especially in developing countries like India. Inflation has therefore been described ‘as enemy number one’.

Measurement of Rate of Inflation:

Inflation has been one of the important problems facing the economies of the world. Precisely stated, inflation is the rate of change of general price level during a period of time. And the general price level in a period is the result of inflation in the past. Through rate of inflation economists measures the cost of living in an economy. Let us explain how rate of inflation is measured. Suppose P i X represents the price level on 31st March 2006 and P represents the price level on 31st March 2007. Then the rate of inflation in year 2006-07 will be equal to

Thus, rate of inflation during 2006-07 will be 10 per cent. This is called point-to-point inflation rate. There are 52 weeks in a year, average of price indexes of 52 weeks of a year (say 2005-06) can be calculated to compare the average of price indexes of 52 weeks of year 2006-07 and find the inflation rate on the basis of average weekly price levels of a year. In both these ways rate of inflation in different years is measured and compared.

It is evident from above that price level in a period is measured by a price index. There are several commodities in an economy which are produced and consumed by the people. It is through construction of a weighted price index that economists aggregate money prices of several commodi­ties which are assigned different weights.

In India the wholesale price Index (WPI) of all commodities with base year 1993-94 price level at the end of fiscal year is used to measure rate of inflation and is widely reported in the media. Since the wholesale price index does not truly indicate the cost of living, separate Consumer Price Index (CPI) for agricultural labourers and Consumer Price Index (CPI) for industrial workers (with base 1982 = 100) at the end of fiscal year are constructed to measure rate of inflation.

In constructing the Consumer Price Index (CPI) the price of a basket of goods which a typical consumer, industrial worker or agricultural labourer as the case may be are taken into account.

What Causes Inflation?

1. keynes’s view:.

Classical economists thought that it was the quantity of money in the economy that determined the general price level in the economy. According to them, rate of inflation depends on the growth of money supply in the economy. Keynes criticized the ‘ Quantity Theory of Money’ and showed that expansion in money supply did not always lead to inflation or rise in price level.

Keynes who before the Second World War explained that involuntary unemployment and depression were due to the deficiency of aggregate demand, during the war period when price rose very high he explained that inflation was due to excessive aggregate demand. Thus, Keynes put forward what is now called demand-pull theory of inflation.

Demand – Pull Inflation

Thus, according to Keynes, inflation is caused by a situation whereby the pressure of aggregate demand for goods and services exceeds the available supply of output (both begging counted at the prices ruling at the beginning of a period). In such a situ­ation, rise in price level is the natural consequence.

Now, this imbalance between aggregate demand and supply may be the result of more than one force at work. As we know aggregate demand is the sum of consumers’ spending on consumer goods and services, government spending on consumer goods and services and net investment being planned by the entrepreneurs.

But excess of aggregate demand over aggregate supply does not explain persistent rise in prices, year after year. An important factor which feeds inflation is wage-price spiral. Wage-price spiral operates as follows: A rise in prices reduces the real consumption of the wage earners. They will, therefore, press for higher money wages to compensate them for the higher cost of living. Now, an increase in wages, if granted, will raise the prime cost of production and, therefore, entrepreneurs will raise the prices of their products to recover the increment in cost.

This will add fuel to the inflationary fire. A further rise in prices raises the cost of living still further and the workers ask for still higher wages. In this way, wages and prices chase each other and the process of inflationary rise in prices gathers momentum. If unchecked, this may lead to hyper-inflation which signifies a state of affairs where wages and prices chase each other at a very quick speed.

2. Monetarist View:

The Keynesian explanation of demand-pull inflation is important to note that both the original quantity theorists and the modem monetarists, prominent among whom is Milton Friedman, explain inflation in terms of excess demand for goods and services. But there is an important difference between the monetarist view of demand-pull inflation and the Keynesian view of it. Keynes explained inflation as arising out of real sector forces.

In his model of inflation excess demand comes into being as a result of autonomous increase in expenditure on investment and consumption or increase in government expenditure. That is, the increase in aggregate expenditure or demand occurs independent of any increase in the supply of money.

On the other hand, monetarists explain the emergence of excess demand and the resultant rise in prices on account of the increase in money supply in the economy. To quote Milton Friedman, a Nobel Laureate in economics. “Inflation is always and everywhere a monetary phenomenon…… and can be produced only by a more rapid increase in the quantity of money than in output.”

Friedman holds that when money supply is increased in the economy, then there emerges an excess supply of real money balances with the public over their demand for money. This disturbs the monetary equilibrium. In order to restore the equilibrium the public will reduce the money balances by increasing expenditure on goods and services.

Thus, according to Friedman and other modern quantity theorists, the excess supply of real monetary balances results in the increase in aggregate demand for goods and services. If there is no proportionate increase in output, then extra money supply leads to excess demand for goods and services. This causes inflation or rise in prices. Thus, according to monetarists let by Prof. Milton Friedman, excess creation of money supply is the main factor responsible for inflation.

Cost-Push Inflation:

Even when there is no increase in aggregate demand, prices may still rise. This may happen if the costs, particularly the wage costs, increase. Now, as the level of employment increases, the demand for workers rises progressively so that the bargaining position of the workers is enhanced. To exploit this situation, they may ask for an increase in wage rates which are not justi­fiable either on grounds of a prior rise in productivity or cost of living.

The employers in a situation of high demand and employment are more agreeable to concede to these wage claims because they hope to pass on these rises in costs to the consumers in the form of rise in prices. Therefore, when inflation is caused by rise in wages or hike in other input costs such as rise in prices of raw materials, rise in prices of petroleum products, it is called cost-push inflation. If this happens we have another inflationary factor at work.

Besides the increase in wages of labour without any increase in its productivity, or rise in costs of other inputs there is another factor responsible for cost-push inflation. This is the increase in the profit margins by the firms working under monopolistic or oligopolistic conditions and as a result charging higher prices from the consumers. In the former case when the cause of cost-push inflation is the rise in wages it is called wage-push inflation and in the latter case when the cause of cost-push inflation is the rise in profit margins, it is called profit-push inflation.

In addition to the rise in wage rate of labour and increase in profit margin, in the seventies the other cost-push factors (also called supply shocks) causing increase in marginal cost of production became more prominent in bringing about rise in prices. During the seventies, rise in prices of raw materials, especially energy inputs such a hike in crude oil prices made by OPEC resulted in rise in prices of petroleum products.

For example, sharp rise in world oil prices during 1973-75 and again in 1979-80 produced significant cost-push factor which caused inflation not only in Indian but all over the world. Now, in June-August 2004 again the world oil prices have greatly risen. As a result, in India prices of petrol, diesel, cooking gas were raised by petroleum companies. This is tending to raise the rate of inflation.

Related Articles:

• Essay on the Causes of Inflation (473 Words)
• Demand Pull Inflation and Cost Push Inflation | Money
• Difference between Demand Inflation and Cost Inflation
• Cost-Push Inflation and Demand-Pull or Mixed Inflation

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In the U.S. and around the world, inflation is high and getting higher

Two years ago, with millions of people out of work and central bankers and politicians striving to lift the U.S. economy out of a pandemic-induced recession , inflation seemed like an afterthought. A year later, with unemployment falling and the inflation rate rising, many of those same policymakers insisted that the price hikes were “transitory” – a consequence of snarled supply chains, labor shortages and other issues that would right themselves sooner rather than later.

Now, with the inflation rate higher than it’s been since the early 1980s, Biden administration officials acknowledge that they  missed their call . According to the latest report from the Bureau of Labor Statistics, the annual inflation rate in May was 8.6%, its highest level since 1981, as measured by the consumer price index . Other  inflation metrics  also have shown significant increases over the past year or so, though not quite to the same extent as the CPI.

With inflation in the United States running at its highest levels in some four decades, Pew Research Center decided to compare the U.S. experience with those of other countries, especially its peers in the developed world. An earlier version of this post was published in November 2021.

The Center relied primarily on data from the Organization for Economic Cooperation and Development (OECD), most of whose 38 member states are highly developed democracies. The OECD collects a  wide range of data  about its members, facilitating cross-national comparisons. We chose to use quarterly inflation measures, both because they’re less volatile than monthly figures and because they were available for all but one OECD country (Costa Rica, which joined the OECD in May 2021). Quarterly inflation data also were available for seven non-OECD countries with sizable national economies, so we included them in the analysis as well.

For each country, we calculated year-over-year inflation rates going back to the first quarter of 2010 and ending in the first quarter of this year. We also calculated how much those rates had risen or fallen since the start of the COVID-19 pandemic in the first quarter of 2020.

To get a sense of longer-term inflation trends in the U.S., we analyzed two measures besides the commonly cited consumer price index: The  Consumer Price Index Retroactive Series  (R-CPI-U-RS) from the Bureau of Labor Statistics, and the  Personal Consumption Expenditures Price Index  from the Bureau of Economic Analysis.

Inflation in the United States was relatively low for so long that, for entire generations of Americans, rapid price hikes may have seemed like a relic of the distant past. Between the start of 1991 and the end of 2019, year-over-year inflation averaged about 2.3% a month, and exceeded 5.0% only four times. Today, Americans rate inflation as the  nation’s top problem , and President Joe Biden has said addressing the problem is his top domestic priority .

But the U.S. is  hardly the only place  where people are experiencing inflationary whiplash. A Pew Research Center analysis of data from 44 advanced economies finds that, in nearly all of them, consumer prices have risen substantially since pre-pandemic times.

In 37 of these 44 nations, the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior. (For this analysis, we used data from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries. The data covers 37 of the 38 OECD member nations, plus seven other economically significant countries.)

Among the countries studied, Turkey had by far the highest inflation rate in the first quarter of 2022: an eye-opening 54.8%. Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued  unorthodox economic policies , such as cutting interest rates rather than raising them.

The country where inflation has grown  fastest  over the past two years is Israel. The annual inflation rate in Israel had been below 2.0% (and not infrequently negative) every quarter from the start of 2012 through mid-2021; in the first quarter of 2020, the rate was 0.13%. But after a relatively mild recession , Israel’s consumer price index began rising quickly: It averaged 3.36% in the first quarter of this year, more than 25 times the inflation rate in the same period in 2020.

Besides Israel, other countries with very large increases in inflation between 2020 and 2022 include Italy, which saw a nearly twentyfold increase in the first quarter of 2022 compared with two years earlier (from 0.29% to 5.67%); Switzerland, which went from ‑0.13% in the first quarter of 2020 to 2.06% in the same period of this year; and Greece, a country that knows something about economic turbulence . Following the Greek economy’s near-meltdown in the mid-2010s, the country experienced several years of low inflation – including more than one bout of deflation, the last starting during the first spring and summer of the pandemic. Since then, however, prices have rocketed upward: The annual inflation rate in Greece reached 7.44% in this year’s first quarter – nearly 21 times what it was two years earlier (0.36%).

Annual U.S. inflation in the first quarter of this year averaged just below 8.0% – the 13th-highest rate among the 44 countries examined. The first-quarter inflation rate in the U.S. was almost four times its level in 2020’s first quarter.

Regardless of the absolute level of inflation in each country, most show variations on the same basic pattern: relatively low levels before the  COVID-19 pandemic  struck in the first quarter of 2020; flat or falling rates for the rest of that year and into 2021, as many governments sharply curtailed most economic activity; and rising rates starting in mid- to late 2021, as the world struggled to get back to something approaching normal.

But there are exceptions to that general dip-and-surge pattern. In Russia, for instance, inflation rates rose steadily throughout the pandemic period before surging in the wake of its invasion of Ukraine . In Indonesia, inflation fell early in the pandemic and has remained at low levels. Japan has continued its years-long struggle with inflation rates that are too  low . And in Saudi Arabia, the pattern was reversed: The inflation rate surged  during  the pandemic but then fell sharply in late 2021; it’s risen a bit since, but still is just 1.6%.

Inflation doesn’t appear to be done with the developed world just yet. An  interim report  from the OECD found that April’s inflation rate ran ahead of March’s figure in 32 of the group’s 38 member countries.

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Increasing Inflation Impact on Individuals Essay

Inflation refers to a general increase in the prices of basic commodities and services, usually taken to represent an average spending pattern (Mankiw, 2012). In simpler terms, inflation is the rise in the cost of living due to an exaggerated increase in commodity prices. As inflation sets in, both individuals, corporations, and the government usually feels its impacts. However, a significant increase in the level of inflation will cause numerous impacts on me as an individual.

Since inflation means a rise in prices of common and basic goods, my purchasing power will reduce since the income shall remain constant as prices rise up (Sexton, 2007). This is because the rate of inflation affects the currency’s purchasing power. As inflation rises, the value of the currency reduces proportionately or even at a higher rate pattern (Mankiw, 2012). Generally, the prevailing rate of inflation dictates the number of goods that I will be able to afford. As the cost of basic such as fuel prices, its trickle-down effects are manifold. The energy prices will increase the prices of foodstuffs such as grains since the machinery costs used in production shall have increased.

Because of a rise in the cost of living, it will lead to lower standards of living since inflation negatively influences the comfort of life. To demonstrate this impact, clearly, there shall be a shift from spending on leisure activities toward basic commodities.

Inflation influences budgeting and planning for investment. Ordinarily, inflation is a phenomenon that happens without the prior and perfect knowledge of an individual, and as such, planned budgets are affected. The confusion created by an uncertain increase in both costs and prices eventually hampers the planning process (Sexton, 2007). Similarly, the amount planned for investment will reduce hence causing a detriment in my overall investment base.

Inflation causes money to lose its value due to a rise in the price level. Since I am a regular saver, the rising inflation will affect me in the sense that I will lose confidence in the currency as a measure of value. This is because the rate of savings will be lower than the inflation resulting in a negative real interest rate on savings (Madura, 2006). For instance, if the per year inflation rate is at 6% while the nominal rate on savings is 3%, it means that the real interest rate on my savings is -3%.

The other effect of inflation will be tendencies of food shortages on the market occasioned by hoarding by sellers. Market analysis shows that an anticipated increase in inflation stimulates hoarding since sellers withhold goods with a view to selling at a higher price. Sellers will begin to cause physical scarcity of food and other products on the market since they would be anticipating better prices in the future (Sexton, 2007). As an individual, it will become difficult to access basic items, and if available, their prices will be excessively farther than what I can afford.

However, I will also be able to benefit from the government intervention plans and policy adjustments geared towards addressing inflation (Madura, 2006). The government’s policy to amend the nominal rates in order to cushion the savers will automatically be advantageous to me. As such, I will be motivated to increase my savings and investment in order to meet my future investment objectives.

Madura, J. (2006). Introduction to business . New York, NY: Cengage Learning.

Mankiw, N.G. (2012). Principles of macroeconomics (6 th .). Mason, OH: South-Western, Cengage Learning.

Sexton, R. L. (2007). Exploring Economics . New York, NY: Cengage Learning.

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1. IvyPanda . "Increasing Inflation Impact on Individuals." January 23, 2021. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/.

Bibliography

IvyPanda . "Increasing Inflation Impact on Individuals." January 23, 2021. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/.

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• Macroeconomic Elements: the Reduction of Oil Prices
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• United Arab Emirates and Norway Economies

Page One Economics ®

Beyond inflation numbers: shrinkflation and skimpflation.

"Education is not the learning of facts but the training of the mind to think."  

—Albert Einstein

Have you seen this month's inflation numbers? Each time new numbers are released, the words inflation and inflation rate receive attention and trend in the news. Inflation is a general, sustained upward movement of prices for goods and services in an economy. It affects purchasing power, or the amount of goods and services that a unit of currency can buy; more specifically, inflation reduces purchasing power. 

The most well-known measure of inflation is the consumer price index (often listed as "CPI"). This is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. These data are collected by a federal agency, the Bureau of Labor Statistics (BLS) , and released every month. 

Inflation numbers are important when assessing the health of the economy and, in one way or another, affect everyone; they affect consumer and business decisionmaking. But it can also be helpful to think beyond inflation numbers, as business practices such as shrinkflation and skimpflation are looming—and worthy of considering.

Inflation's Effects on Consumers

You may not know the recent inflation numbers, but you've likely experienced their results. You don't have to be an economist to understand that spending more to buy the same cart of groceries means inflation is a concern. You don't have to read the BLS's monthly report to understand that inflation erodes the purchasing power of money. You experience inflation each time you spend more money to buy the same cart of groceries.

Inflation affects consumers' budgets and spending decisions. If consumers' personal incomes do not increase, or they increase at a slower rate than the inflation rate, then consumers aren't able to buy the same amount of goods and services they could previously. When consumers are faced with spending more to get the same amount of goods and services, they may purchase fewer items or substitute less-expensive goods and services.

Inflation's Effects on Businesses 

Inflation also affects businesses. Businesses understand the reality of inflation when the costs of production increase and they must adjust to continue to earn a profit . Often businesses pass the higher costs of production on to consumers through higher prices. When this leads to inflation, it is referred to as cost-push inflation . For example, if the cost of transporting lettuce from California to Maine increases because fuel prices have increased, and the seller believes they can pass the extra cost along to the buyer, then the price consumers pay for lettuce at the grocery store will increase.

Business Reactions to Inflation 

Businesses can raise prices to remain profitable when production costs increase. But they know that consumers are very conscious of price changes and may choose to buy a cheaper brand or stop buying the item completely. Businesses do not want to lose sales. For example, after increasing prices, one coffee shop owner lost nearly half their regular customers and posted the following on social media:

Some have traded down and are buying coffee for $1 at the McDonald's. If [customers] can get it for a dollar for not that notable of a difference, they're going next door. One customer who had been coming in for years said he was going to start making coffee at home, so he won't be coming in here every day. 1

Shrinkflation

How can businesses cope with inflation and their desire to keep their customers? Businesses know that for some goods and services, consumers are more sensitive to changes in price 2 than to changes in quantity, and this tendency often allows businesses to benefit from shrinkflation. 

Originally known as downsizing, the term shrinkflation comes from the combination of the two words shrink and inflation . Shrinkflation is when businesses reduce the size or quantity of their products while charging the same or an even higher price. 3 For example:

• A package of bacon may look the same and sell for the same price, but instead of being 16 ounces it is only 12 ounces. 
• Similarly, a box of cereal that used to contain 18 ounces may look the same but contain only 16 ounces of cereal. 
• Or, a box of tissues may have fewer tissues than before when sold at the same price. 

The BLS treats shrinkflation as a price increase when calculating inflation numbers. It makes adjustments for changes in the size or quantity of a packaged item to ensure consumers can accurately compare prices despite the changes in size or quantity. 4  

Although inflation numbers take shrinkflation into account, consumers have the responsibility to notice the changes in the size or quantity of a packaged item. Consumers can easily find examples of shrinkflation at the grocery store (table).

Shrinkflation varies by product and brand, which means it's important for consumers to compare products and prices in order to make wise spending decisions. Con­sumers can compare product prices by considering unit prices. A unit price changes when the ounces, pounds, or quantity of a product changes but its price remains the same or increases. 

For example, if a roll of paper towels is priced at $3 and has 165 sheets per roll, the unit price is $0.018 per sheet. If the package is downsized to only 147 sheets and the price remains the same, the unit price increases to $0.02 per sheet. In this instance, buying the downsized product means getting less product for the same money.

Shrinkflation History

Shrinkflation is not new and is not limited to times of inflation. However, when inflation is rising and businesses face rising costs, the practice increases. 5 Often, changes happen over time and go unnoticed by the average consumer. 

For example, consumers used to buy coffee in a 1-pound can. But a 1988 report shows that the brand Chock full o'Nuts ® reduced the amount of their coffee in a 1-pound can to 13 ounces; by 2003, the brand had further reduced it to 11 ounces of coffee. 6 Similarly, ice cream businesses used to sell their ice cream in 64-ounce containers. Then, beginning around 2008, they shrunk their containers to 48 ounces. 7  

Smaller-sized packages don't always mean reduced prices. Consumers usually end up paying the same for less product. Of course, the labels on packages have the weight listed, but consumers don't always read the labels or notice the changes, which become accepted.

In some cases, the size and shape of containers are changed, which camouflages any reduction in the amount of a product. For example, a business might use a taller and thinner container that looks similar but holds less product: The 32-ounce Gatorade ® bottle was redesigned to a more aerodynamic 28-ounce size, but the price remained the same. 8 Or have you noticed that little dimple on the bottom of jars of peanut butter? A slightly larger dimple means slightly less peanut butter in the jar, but most consumers do not notice the change. 9

Is Shrinkflation Legal? 

In 1967, the Fair Packaging and Labeling Act (FPLA) was enacted to ensure that consumers had enough information to make an informed choice between competing products. The Act requires each package of household "consumer commodities" included in the FPLA's coverage to have a label that includes the net quantity of contents in terms of weight, measure, or numerical count (measurement must be in both metric and inch/pound units). 10

The FPLA also states that "Packages and their labels should enable consumers to obtain accurate information as to the quantity of the contents and should facilitate value comparisons." 11 So, shrinkflation is legal—if businesses clearly mark their products with an accurate weight that allows consumers to compare prices.

Skimpflation

Instead of increasing prices, businesses might decide to do something called skimpflation. Skimpflation is defined as businesses "skimping" on the quality of a product or service. Businesses skimp by spending less on services or materials to remain profitable. From NPR's Planet Money newsletter: "Skimpflation is a form of inflation…. It means we're getting less for our money." 12

One example of skimpflation is when customers do more of the work. When customers do more of the work, the business provides less service. This practice is seen with the first self-service supermarket—Piggly Wiggly ® . The first Piggly Wiggly ® opened in 1916 in Memphis, Tennessee. Instead of clerks behind a counter gathering products for customers, Piggly Wiggly ® provided carts for shoppers to go up and down the aisles to select their own items and then pay at a register—doing more of the work that was once done by clerks.

Later, starting in 1986 and as the technology developed and became cost-effective, self-checkout machines were introduced in many stores to lower stores' labor expenses. With customers doing the work at the self-checkout line, businesses skimp on service. When the cost of the technology became less than the cost of labor, this newer mode of operation took root. From this beginning, some stores such as Walmart, Kroger, and Dollar General are now piloting exclusively self-checkout stores. 13 Busi­nesses with self-checkout lines create a faster process for the customers, which allows the stores to have fewer workers for this process. 14

Skimpflation means skimping on service by cutting costs. For example, hotels may make changes in their housekeeping services. Instead of workers cleaning guest rooms daily, their service may be reduced to every other day or when a guest checks out. This change reduces labor costs. 15

There can be skimping on quality, too. Those hot, complimentary hotel breakfast buffets that include fresh fruit, waffles, eggs, and bacon may be replaced by prepackaged sweet rolls and cereal. Replacing more-expensive foods with cheaper foods is a way to cut costs.

And businesses may change their formulas for food products to use cheaper ingredients in these products. For example, artificial sweeteners and cheaper oils may be substituted for more expensive ingredients. Unless consumers compare the ingredients label from an older product with the new one, they won't be aware of the change when making a purchase. But businesses take a risk when switching a formula to use cheaper ingredients. If the change is noticeable to consumers and they don't like the change in taste, they may stop buying the product. 

Consumers may notice a change in a food's taste, but skimping on quality is harder to detect in some other products. For example, toilet tissue may be packaged the same and have the same number of sheets per roll, but it may have thinner sheets. Looking at the package, a consumer wouldn't know of that change in quality. 16  

Inflation numbers are economic indicators collected and released monthly by the BLS to assess the health of the economy. But inflation is more than numbers. Consumers and businesses alike face decisions when dealing with the reality of inflation. Consumers may have to choose to spend more for necessities and less for non-essentials. Businesses may use shrinkflation or skimpflation to cover rising costs and remain profitable. 

With shrinkflation, it's a consumer's responsibility to read product labels and think about the unit price of products they purchase. It's the law for businesses to have information on labels about the contents of their packages, but this won't matter unless consumers read what the labels says. Skimpflation is another way that businesses deal with the reality of inflation. Consumers must consider paying the same prices for reduced quality or service when deciding what to purchase. Shrinkflation and skimpflation are a reality of inflation. Inflation numbers provide the facts, and those numbers give consumers and businesses something worth thinking about.

1 Anderson, Mae. "As Small Businesses Raise Prices, Some Customers Push Back." AP News , September 11, 2022; https://apnews.com/article/inflation-new-york-small-business-d4204d27e692fe9673175f9cb2f03796 . 

2 Greenwood, Veronique. "The Food You Buy Really Is Shrinking." BBC Worklife , May 13, 2018; https://www.bbc.com/worklife/article/20180510-the-food-you-buy-really-is-shrinking . 

3 Rosalsky, Greg. "Beware Of 'Shrinkflation,' Inflation's Devious Cousin." NPR Planet Money , July 6, 2021. https://www.npr.org/sections/money/2021/07/06/1012409112/beware-of-shrinkflation-inflations-devious-cousin .

4 U.S. Bureau of Labor Statistics. "Consumer Price Index Frequently Asked Questions: How and When Are CPI Prices Collected and Reviewed?" March 23, 2022; https://www.bls.gov/cpi/questions-and-answers.htm#Question_11 . 

5 Associated Press. "'Shrinkflation' Accelerates Globally as Manufacturers Quietly Shrink Package Sizes." NPR Your Money , June 8, 2022; https://www.npr.org/2022/06/08/1103766334/shrinkflation-globally-manufacturers-shrink-package-sizes . 

6 McDermott, Tricia. "A Pound of Coffee?" CBS News , March 7, 2003; https://www.cbsnews.com/news/a-pound-of-coffee-07-03-2003/ . 

7 Greenwood, Veronique (2018). See footnote 2. 

8 Diaz, Clarissa. "Shrinkflation: How Inflation Is Downsizing Some of Your Favorite Foods." World Economic Forum , March 22, 2022; https://www.weforum.org/agenda/2022/03/how-companies-are-hiding-inflation-without-charging-you-more/ .

9 Greenwood, Veronique (2018). See footnote 2. 

10 United States Code. "Chapter 39—Fair Packaging and Labeling Program," in U.S. House of Representatives Office of the Law Revision Counsel, Title 15—Commerce and Trade . Washington, DC, 1967; http://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title15-chapter39&edition=prelim . 

11 United States Code (1967). See footnote 10. 

12 Rosalsky, Greg. "Meet Skimpflation: A Reason Inflation Is Worse than the Government Says it Is." NPR Planet Money , October 26, 2021; https://www.npr.org/sections/money/2021/10/26/1048892388/meet-skimpflation-a-reason-inflation-is-worse-than-the-government-says-it-isz .

13 Meyersohn, Nathaniel. "Nobody Likes Self-Checkout. Here's Why It's Everywhere." CNN Business , July 10, 2022; https://www.cnn.com/2022/07/09/business/self-checkout-retail/index.html .

14 Rosalsky, Greg (October 2021). See footnote 12. 

15 Picchi, Aimee. "The Flip Side of Inflation: 'Skimpflation' Is Hitting Everything from Food to Hotels." CBS Money Watch , October 4, 2022; https://www.cbsnews.com/news/skimpflation-inflation-reducing-food-service-quality/ . 

16 Picchi, Aimee (2022). See footnote 15.

© 2022, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Budget: An itemized summary of probable income and expenses for a given period. A budget is a plan for managing income, spending, and saving during a given period of time.

Bureau of Labor Statistics (BLS): A research agency of the U.S. Department of Labor that compiles statistics on employment, unemployment, and other economic data. 

Cost-push inflation: Inflation that occurs when the costs of production (including wages and raw materials) increase, and those higher costs are passed on to consumers.

Costs of production: The amount producers pay for the resources used to produce a product.

Income: The payment people receive for providing resources in the marketplace. When people work, they provide human resources (labor) and in exchange they receive income in the form of wages or salaries. People also earn income in the forms of rent, profit, and interest.

Inflation rate: The percentage increase in the average price level of goods and services over a period of time.

Profit: The amount of revenue that remains after a business pays the costs of producing a good or service.

Spending: Using some or all of your income to buy things you want now.

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How to Write About Inflation

Daniella flores.

• March 8, 2022
• Blogging and Podcasting

Ugh, inflation.

If you’re anything like me, you cringe at the sight of the word. To me, it means things are getting more expensive and who loves that? No one, especially not my budget .

It’s 2022, we’re entering the 3rd year of a global pandemic, and inflation is the highest since 1982 according to Trading Economics .

You can watch all the news channels, read all the financial news articles, or even talk to your angry uncle about how inflation is out of control because “Uncle Sam is screwing us again”, but after all of that you are left pretty clueless to what it even is and how it might be affecting your own life.

As we dive into how to write about inflation, let’s get clear on what exactly inflation is, what causes it, how it affects you, and who is profiting from all of it.

What is Inflation?

Inflation is a measure of the rate of rising prices of the goods and services in an economy. When prices rise, the purchasing power of your money decreases.

The purchasing power of our dollar goes down because we have to use more dollars to meet those rising prices. Ultimately, the less we are able to purchase with our dollars the more inflation rises.

What Causes Inflation?

There are several factors that can drive prices upward in an economy. Typically, inflation can result from an increase in production costs or an increase in demand for products and services.

Some of the various factors that drive inflation include:

• Cost-push inflation: When production costs increase due to increase in raw materials or wages, prices for those products or services increase.
• Demand-pull inflation: When there is a strong consumer demand for a product or service, the prices will increase.
• The housing market: When the demand for housing increases, home prices will rise.
• Expansionary fiscal policy: Fiscal policy is how the government adjusts its spending and tax rates to monitor and influence the economy.

How to Write About Inflation?

When writing about inflation, you have to know your audience and who you’re talking to. Inflation has several nuances of impact depending on the sector and personal experience.

It’s best to simplify it down as much as you can when talking to your audience and do so without bias.

To break inflation down in terms that a 5 year old can understand, I spoke with someone who is much more qualified and experienced on the subject, Jonathan Thomas M.B.A., who is a Financial Coach and the host of Money Talks , a YouTube channel that helps folks to turn their financial goals into day to day decisions.

Jonathan simplifies inflation as “Inflation means everything costs more to produce. When I was a kid a cheeseburger cost me 50 cents at McDonald’s. Every year the cost rose on food like bread, meat, cheese, etc. Because the cost to make a cheeseburger went up, McDonald’s had to raise the price. Now a cheeseburger costs $1.59.”

Give Examples in Your Writing, Especially for Those More Complicated Experiences of Inflation

When talking about inflation, it’s best to pair examples and analogies like Jonathan did to help the reader better understand it, how it affects them, and how it might affect those around them.

For instance, an example from my own life is the experience of the rise of housing costs from one end of the country to the other during the height of Covid-19 in 2020 which could illustrate a more complex form of inflation.

My wife and I moved across the country in December 2020 after we both became location independent, meaning we could work from anywhere. We weren’t the only people that did this in the last couple of years.

In fact, 15.9 million people had already moved by the time we did and their decision to move was influenced by the pandemic in one way or another. Some of those people had to move because of rising rent costs and other financial reasons like job loss. Others feared getting Covid-19 where they lived or wanted to move to be closer to family.

This drove the price of housing up and fast.

We moved from St. Louis, Missouri where the housing prices are below the national average, to a small town in Washington state where the housing is much higher. We went from a $100k house to almost a $300k house.

Our real estate broker explained that because so many people in the larger cities were moving to rural areas like the one we were moving to, this sort of mass migration drove the demand for housing up.

At the same time with increasing demand, there was a smaller inventory of affordable housing available and few new building projects for that same category of affordable housing in the area. This created a seller’s market with bidding wars on new available listings sometimes starting as soon as the house was listed.

Folks were buying houses without ever looking at them, waiving inspections, and due to bidding wars would offer sometimes as much as $50k over asking price for the same house you’d find in St. Louis, MO for $200k less.

Jonathan explains that a part of this equation is “Demand increased for real estate so the cost of lumber increased as there wasn’t enough available for everyone to keep building.”

The other part includes the Federal Reserve’s influence on interest rates that kept mortgage rates low during this time as well, surging that housing demand even higher as it meant American’s could secure mortgages at the lowest interest rate in history in December 2020 – 2.68%.

Framing Inflation as Good or Bad

Inflation can be both good and bad. However, how you write about inflation must take into account your reader’s experience with their current financial situation and how inflation might be impacting that experience.

For instance, if you say inflation is good because it means people can make more money and their assets can build wealth quicker, your reader may not resonate with that same perspective.

If your reader had a house in Washington at the height of the seller’s market last year, they would’ve seen that inflation as a good thing for them because it increased the value of their own house. Some folks could sell their house for as much as $500,000 more than what they bought it for.

Then there were folks on the other side of that fence where they were ready to purchase their first home that year, and found nothing they could afford. Or they lost a job and couldn’t afford rent anymore. So, they had to leave their home to move somewhere cheaper to turn around and see the landlord listing their home for half the price after so they could fill the unit with a tenant.

It’s also because of the rate of inflation since then that folks are seeing those same discounted rents, now going back up.

Inflation can be good and bad for everyone. Be mindful of how you frame it to your audience.

Conclusion: How Well Do You Know Your Audience?

When you discuss any sort of financial topic, it is crucial that you know exactly who you’re talking to. People have charged reactions to reading financial content because of how personal and political money is. Charge them up in a positive way, not a negative one.

Start with a simple audience persona which you can use a template like the one found here . Ask yourself what are the most common problems that your audience might have with inflation and then speak to those problems when covering the topic.

If you know your audience, writing about inflation is going to be a breeze.

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Inflation: Four Questions Requiring Further Research to Inform Monetary Policy

I appreciate the opportunity to present closing remarks at the Inflation: Drivers and Dynamics Conference. The views I present will be my own and not necessarily those of the Federal Reserve System or of my colleagues on the Federal Open Market Committee.

Let me start by thanking the organizers at the Federal Reserve Bank of Cleveland and the European Central Bank for putting together such a strong program and the ECB for its hospitality. It has been a very productive two days focused on frontier research on inflation. High inflation has been the major challenge facing many central banks over the past two years. Returning the economy to price stability in a sustainable and timely way has driven monetary policy decisions.

The U.S. Economy

In the U.S., since early last year, the Federal Reserve has been tightening the stance of monetary policy. We have raised the target range of the federal funds rate by 5-1/4 percentage points. We are also reducing the size of the Fed’s balance sheet by allowing assets to roll off in a systematic way according to the plan announced in May 2022, which also helps to firm the stance of monetary policy. The tightening of monetary policy has led to a broader tightening in financial conditions. Banks, which play an important part in monetary policy transmission, have been tightening their credit standards, making credit less available to businesses and households. In addition, Treasury yields, mortgage rates, and credit spreads have risen.

The monetary policy actions taken to date are helping to moderate demand in both product and labor markets and to alleviate some of the imbalances that have contributed to price pressures. Real output growth has slowed from its robust pace in 2021. Supply is also adjusting, with disruptions in supply chains having generally improved over time. In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong. Job growth has slowed and job openings are down, but the unemployment rate is low, at 3.8 percent, and the vacancy-to-unemployment ratio is still above its level during the strong labor market conditions in 2019. Labor supply conditions are helping to rebalance the labor market; the labor market participation rate of workers between the ages of 25 and 54 is above what it was before the pandemic.

Progress continues to be made on inflation, with total PCE inflation down significantly from its peak. Underlying measures of inflation have also improved but less so. Despite high inflation rates, medium- and longer-term inflation expectations remain reasonably well-anchored in a range consistent with the Fed’s goal of 2 percent inflation. Although there has been some progress, inflation remains too high. The FOMC is committed to moving inflation down to 2 percent. The monetary policy questions are whether the current level of the federal funds rate is sufficiently restrictive and how long policy will need to remain restrictive to keep inflation moving down in a sustainable and timely way to our goal of 2 percent. Future policy decisions will be about managing the risks and the intertemporal costs of over-tightening vs. under-tightening monetary policy. This assessment will require close monitoring of economic, banking, and financial market developments and using all of that economic reconnaissance to determine whether the economy is evolving in line with the outlook or not. The outlook will need to be informed not only by the incoming data but also by our models of and understanding of inflation dynamics, which has been the topic of this conference.

Inflation Research

The period of high inflation has highlighted that there are many things we do understand about inflation. In particular, when demand is outpacing supply, in an environment of very accommodative fiscal and monetary policy – the conditions that characterized the economy in 2021 after the pandemic-induced shutdown – inflation will begin to rise and it will remain persistent until monetary policy is recalibrated to moderate demand. Nonetheless, making such assessments in real time is difficult, especially when supply conditions are not stable, and forecasting inflation remains challenging. Indeed, FOMC participants underestimated inflation for much of the high-inflation period. But policymakers are required to make decisions based on the available, albeit limited information.

Further research is needed on many facets of inflation and inflation dynamics. Since I am in a room full of researchers, I want to highlight some of the questions whose answers would help inform monetary policy decisions. I took the same route when I presented keynote remarks at this conference in 2014, and it turns out that several of the questions I asked are still relevant. 1 Don’t be too discouraged: Progress has been made in addressing them. But the period of high inflation and structural changes to the economy during the pandemic and its aftermath have presented new questions and different takes on old questions. Further research will be needed to answer these questions, furthering our understanding of inflation as an aid to monetary policymaking.

Research Questions

The first question I asked in 2014 remains relevant: How can we best estimate the underlying trend in inflation?

Monetary policymakers are charged with keeping inflation at its longer-run goal and monetary policy affects the economy with long and variable lags. Both factors mean that policymakers need to be able to forecast inflation over the medium and longer run. So they need a method to separate temporary changes from changes that are more persistent. When the economy reopened after the pandemic-induced shutdown, U.S. monetary policymakers attributed much of the increase in inflation to supply shocks that were expected to be transitory, with inflation expected to return to its low pre-pandemic trend. It took some time and repeated under-forecasts of inflation for policymakers to realize that the conditions for high inflation were in place and that aggressive policy action was required. Better understanding of the factors that affect the medium-run inflation trend and ways to separate temporary changes from changes that are more persistent would have helped to avoid the situation.

Separating temporary from more persistent factors is challenging to do in real time, not only because some of the inflation data get revised (including the PCE inflation measure that the Fed targets), but also because measured inflation reflects a combination of factors: idiosyncratic factors, broader but temporary macroeconomic factors, and more persistent movements that affect the underlying inflation trend. One approach to estimating the underlying trend is to remove items that are often the sources of temporary movements in inflation. The traditional core measures of inflation in the U.S. exclude the prices of food and energy because they are thought to be very volatile. Another approach recognizes that other components can show more volatility than food and energy and derives measures that exclude components with the most extreme movements each month. The median and trimmed-mean inflation rates are of this type. 2 Some papers have shown that these types of measures can help to identify the underlying trend and may outperform measures of core inflation in forecasting total (aka headline) inflation. 3

There are also statistical models that try to isolate the trend from the noise and identify the cyclical and acyclical components of core inflation, where the cyclical components are, by definition, those associated with labor market tightness. 4

The literature has not discerned a best way to isolate the inflation trend; so, in practice, to forecast inflation, policymakers tend to look at all the measures of inflation, data on the real side of the economy, anecdotal reports from community and business contacts, and various models. Many of the forecasting models being used are informed by theoretical models of inflation dynamics.

Which brings me to my second question : Can we reconcile the actual pricing behavior of firms with predictions from the New Keynesian model, the workhorse inflation model used by many central bank economists?

In recent years, a considerable amount of research has examined the real-world pricing behavior of firms and incorporated these facts into macroeconomic models. 5 In fact, several papers presented at the conference explicitly incorporate micro data into macro models. 6 I view this as a continuation of the desirable approach of ensuring that our macro models are based on sound micro foundations.

The availability of data on individual prices has made advances possible. New surveys are also being used to better understand firms’ pricing behavior. For example, a survey conducted by researchers from the Cleveland, Atlanta, and New York Feds found that firms’ prices are strongly influenced by their perceptions about demand for their products, a desire to maintain steady profit margins, and their labor costs. 7 The paper based on the survey, and included in the conference’s poster session, estimates that cost-price passthrough at firms was about 60 percent on average, but that there was considerable heterogeneity across the firms. Interestingly, although firms do tend to raise their prices when wages rise, other research from the Cleveland Fed indicates that consumers do not expect their wage growth to keep up with inflation. The researchers find that a 1 percentage point increase in inflation expectations causes expectations of income growth to rise by only two-tenths of a percentage point; in other words, respondents expect rising inflation to hurt their real income. This might help to explain why people dislike high inflation even when the labor market is strong. 8

Research such as this can help to close the gap between the macro models we use to inform our monetary policy decisions and the microeconomic data. In addition, research on actual pricing behavior can also inform the framework for setting monetary policy. For example, at first blush it might seem that having a higher inflation target, all else equal, gives monetary policymakers more room to move the nominal interest rate down before hitting the effective lower bound; they could then provide more stimulus to the economy, if needed. But Cleveland Fed research suggests that all else would not be equal. 9 In particular, a higher inflation target would not provide as much policy room as one might expect; raising the inflation target would be subject to the Lucas critique. With higher steady-state inflation, firms would change their price-setting behavior and adjust their prices more frequently. Because monetary policy’s ability to affect real activity depends on the degree of price stickiness, a higher inflation target would make monetary policy less effective because firms would be changing their prices more frequently. The research’s quantitative result suggests that to increase policy space by 2 percentage points, instead of increasing the inflation target from 2 percent to 4 percent, one would need to increase the target to 5 percent. If you add to this the costs of having to change posted prices more often, the higher level of relative price distortions because everything is not indexed, higher shoe-leather costs from searching for the lowest prices, and the higher inflation volatility associated with higher inflation, the benefits of setting a higher inflation target are not compelling.

The Fed’s inflation target is 2 percent, and we are committed to returning inflation to 2 percent in a sustainable and timely way. This explicit target was first established in the FOMC’s statement on longer-run goals and monetary policy strategy in January 2012, and it has been reaffirmed every year since then. The 2 percent target was taken as given when the FOMC undertook its review of the monetary policy framework in 2019. The revised statement on longer-run goals and monetary policy strategy, which reflects the outcome of the review, recognizes the importance of keeping inflation expectations well-anchored at levels consistent with 2 percent inflation. 10 And by “well-anchored” I mean longer-term inflation expectations that are insensitive to data.

One of the big lessons from the 1970s is that it is much more difficult and costly to bring inflation down once it has become embedded in the economy, that is, once businesses and households expect inflation to remain elevated and those expectations influence their savings and investment decisions and price-setting and wage-setting behavior. Indeed, inflation expectations have been a central factor in models of inflationary dynamics since the 1960s and 1970s. 11 The theory indicates that well-anchored longer-term inflation expectations can help to mitigate the pull of resource gaps on inflation, and therefore, the cyclical movements in interest rates that policymakers induce to maintain price stability need not be as large as when inflation expectations are not well-anchored.

Putting the theory into practice brings me to my third question : For the purposes of setting monetary policy, how should inflation expectations be measured and over what time horizon?

One difficulty in moving from theory to practice is that while the models talk about “inflation expectations,” these expectations are not directly observable. So policymakers look at a number of measures that differ by type of agent and time horizon. These include measures based on surveys of consumers, businesses, and professional forecasters; measures derived from financial markets; and composite indices that combine various measures. A clear signal is not always forthcoming because the inflation expectations of different groups of agents can behave differently from one another. Even within groups there can be variation, and the literature has not firmly established whose expectations are most important for inflation dynamics. 12

Households may find it challenging to answer questions about the economic concept of inflation. Recent Cleveland Fed research found that when consumers are asked about what they think inflation will be in the future for the various categories of consumer spending, their answers do not aggregate up using any plausible weighting scheme to what they expect overall inflation will be. 13 Aggregated inflation expectations over categories tend to be lower than expectations of overall inflation, and the bottom-up aggregated expectations explain a greater share of planned consumer spending. This inconsistency reinforces the approach taken by policymakers to look at various measures of inflation expectations.

Indeed, several new measures are increasing our understanding of inflation expectations. Researchers at the Cleveland Fed have developed a measure of inflation expectations that does not require the respondents to understand the economic concept of aggregate inflation. The Cleveland Fed’s indirect consumer inflation expectations (ICIE) measure, which started in 2021, is based on a nationwide survey with more than 10,000 responses and is updated on a weekly basis. Instead of asking consumers directly about overall inflation, the survey asks consumers how they expect the prices of the things they buy to change over the next 12 months and how much their incomes would have to change for them to be able to afford the same consumption basket and be equally well-off. 14 According to this measure, women’s inflation expectations have tended to run higher than those of men, and older respondents and more educated respondents also have reported higher inflation expectations than their counterparts.

Less information has been available on firms’ inflation expectations, even though firms are the price setters. But new data series are being developed. For example, the Cleveland Fed has begun publishing the Survey of Firms’ Inflation Expectations (SoFIE), a nationally representative, quarterly survey of CEOs and other top business executives, which was started by academics in 2018. 15 The survey data indicate that the year-ahead inflation expectations of these business executives rose as inflation increased in 2021 and 2022. Their expectations began to decline in 2023 but remain elevated at 4.3 percent as of July. Perhaps more troubling is that when respondents were asked in April what they thought the Fed’s inflation target was, the mean response was 3.1 percent. This is higher than our target of 2 percent and also nearly a percentage point above the mean response before the pandemic.

Monetary policymakers typically focus on medium- to longer-term inflation expectations because this is the time horizon over which monetary policy can be expected to affect the economy and is more reflective of consumers’ perceptions of the Fed’s commitment and ability to return the economy to price stability. Ample research shows that changes in the prices of particular salient items, including gasoline and food, which are independent of monetary policy, can have an outsized effect on households’ shorter-run inflation expectations. 16 However, recent research by Cleveland Fed economists indicates that policymakers should not ignore persistently elevated levels of shorter-term inflation expectations and focus only on longer-term expectations. The researchers find persistent differences in inflation expectations across consumers of different ages and that households form their expectations of inflation based on their lifetime experience of inflation. 17 When this mechanism is incorporated into a conventional New Keynesian model, inflation shocks are more persistent than otherwise, and the optimal response is for monetary policy to tighten when short-run inflation expectations rise even if longer-run expectations are stable. Doing so helps to limit the experience households have with high inflation, which helps to keep inflation expectations anchored in the future.

Better understanding of how households and firms form their inflation expectations will help inform how monetary policymakers should respond when inflation deviates from the target. This brings me to my fourth and final question : How should monetary policymakers respond to supply shocks?

The current episode of high inflation has been a challenging one. In the U.S., inflation began rising in the spring of 2021. A sequence of supply shocks, driven first by the pandemic and then the war in Ukraine contributed to the high inflation. These supply shocks were concentrated in the goods sector, which was already seeing a surge in demand as consumers shifted spending from services to goods during the pandemic-induced shutdown and when they continued to take social distancing measures once the economy reopened. The supply shocks exacerbated the imbalances between demand and supply, which, in an environment of very accommodative fiscal and monetary policy, led to a significant and persistent increase in inflation.

The episode has called into question the conventional view that monetary policy should always look through supply shocks. The thinking is that supply shocks tend to be transitory, and while they raise the price level for a time, they do not lead to a persistent increase in inflation or inflation expectations. Moreover, since monetary policy acts with a lag, if policymakers were to react to a transitory supply shock, it would be counterproductive, affecting the economy after the supply shock had dissipated. But to the extent that supply shocks are more persistent or there is a sequence of supply shocks, this thinking need not apply because such shocks can threaten the stability of inflation expectations and this would require policy action. Indeed, when inflation expectations are not firmly anchored, if monetary policy fails to react in an appropriate way, what starts out as a potentially temporary shock could lead to more persistent effects on inflation. 18

This brings up the possibility that monetary policy may want to react differently depending on the nature of the shock that has led to a rise in inflation, with the reaction dependent on the size and persistence of the shock, because different shocks have different implications for inflation expectations. An interesting paper presented at the conference suggests that in an environment where prices are more flexible than wages and agents have bounded rationality rather than fully rational expectations with respect to inflation, policy may want to respond more aggressively to supply shocks when inflation is already high and less aggressively when inflation is low. 19 This can lead policymakers to first look through supply shocks and then respond more aggressively as inflation moves up, which arguably characterizes the current high-inflation episode. However, other interesting research shows that optimal monetary policy responses depend critically on how inflation expectations are formed and how well they are anchored. In one model, when expectations differ from rational expectations and are not well-anchored, policymakers are better off responding earlier to signs that inflation is rising rather than delaying and only then responding aggressively. 20 The implication is that when there is uncertainty, policymakers should overestimate the degree of persistence of inflation shocks rather than underestimate it.

More research on the timing and magnitude of the optimal monetary policy response in the face of different types of shocks and when inflation expectations deviate from rational expectations would be helpful to policymakers.

To conclude, let me again thank the organizers at the European Central Bank and at the Cleveland Fed for putting together such a strong conference program. When we started the Cleveland Fed’s Center for Inflation Research in December 2018, some people raised an eyebrow. They questioned the center’s focus because inflation had been so benign for quite some time. It turned out to be precisely the right time to further the research agenda on inflation. Maintaining price stability is the responsibility of the central bank and only the central bank can deliver on this goal over time. While considerable progress has been made on developing inflation models and measures that can better inform monetary policymaking, we still have much to learn about inflation dynamics. I encourage the researchers participating in this conference to continue furthering their research agendas because good policymaking depends on the research that informs it.

• See Mester (2014). Return to 1
• The Federal Reserve Bank of Cleveland produces the median and trimmed-mean CPI inflation rate and the median PCE inflation rate. The Federal Reserve Bank of Dallas produces the trimmed-mean PCE inflation rate. The Federal Reserve Bank of Cleveland’s Center for Inflation Research produces inflation measures and analyses of inflation and inflation expectations to inform policymakers, researchers, and the general public ( https://www.clevelandfed.org/center-for-inflation-research ). Return to 2
• See Bryan and Pike (1991), Bryan and Cecchetti (1993), and Bryan, Cecchetti, and Wiggins (1997) for CPI, and Meyer, Venkatu, and Zaman (2013), Meyer and Zaman (2019), and Smith (2004) for PCE. An exception is Crone, et al. (2013), who find that headline PCE inflation can beat the core measure in predicting future PCE inflation. Return to 3
• See Stock and Watson (2020) and Zaman (2019). Return to 4
• Klenow and Malin (2010) review the literature. Return to 5
• These papers include Adam, Alexandrov, and Weber (2023), Gagliardone et al. (2023), Lan, Li, and Li (2023), and Sara-Zaror (2021). Return to 6
• See Dogra, et al. (2023). Return to 7
• See Hajdini, et al. (2023). Return to 8
• See L’Huillier and Schoenle (2023). Return to 9
• The FOMC’s statement on longer-run goals and monetary policy strategy, revised in 2020 and reaffirmed since then, says that the Committee judges that longer-term inflation expectations that are well-anchored at 2 percent contribute to achieving its monetary policy goals. See Federal Open Market Committee (2023). Return to 10
• See Phelps (1967), Friedman (1968), and Lucas (1972). For further discussion see Mester (2022a,b). Return to 11
• Candia, Coibion, and Gorodnichenko (2021) find that the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Return to 12
• See Dietrich, et al. (2022). Return to 13
• The ICIE series is available on the Central Bank Research Association (CEBRA) website at https://cebra.org/indirect-consumer-inflation-expectations/ . For background on the survey and results using the survey, see Hajdini, et al. (2022a,b). Return to 14
• The Survey of Firms’ Inflation Expectations (SoFIE) was created by Professors Olivier Coibion and Yuriy Gorodnichenko; it is maintained by the Federal Reserve Bank of Cleveland at https://www.clevelandfed.org/indicators-and-data/survey-of-firms-inflation-expectations . For background on the survey, see Garciga et al. (2023). Return to 15
• For the effect of salient prices on inflation expectations, see Coibion and Gorodnichenko (2015), Cavallo, Cruces, and Perez-Truglia (2017), D’Acunto, et al. (2021), and Campos, McMain, and Pedemonte (2022). Return to 16
• See Pedemonte, Toma, and Verdugo (2023). Return to 17
• Reis (2021) and Walsh (2022) discuss the importance of anchored inflation expectations, drawing on the experience of the U.S. during the 1960s and 1970s. Return to 18
• See Beaudry, Carter, and Lahiri (2022). Return to 19
• See Walsh (2022). Return to 20
• Adam, Klaus, Andrey Alexandrov, and Henning Weber, “Inflation Distorts Relative Prices: Theory and Evidence,” CEPR Discussion Paper DP18088, April 18, 2023. ( https://cepr.org/publications/dp18088 )
• Beaudry, Paul, Thomas J. Carter, and Amartya Lahiri, “Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma,” Bank of Canada Staff Working Paper 2022-41, October 13, 2022. ( https://www.bankofcanada.ca/2022/09/staff-working-paper-2022-41/ )
• Bryan, Michael F., and Christopher J. Pike, “Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation,” Federal Reserve Bank of Cleveland, Economic Commentary, December 1, 1991. ( https://doi.org/10.26509/frbc-ec-19911201 )
• Bryan, Michael F., and Stephen G. Cecchetti, “Measuring Core Inflation.” Federal Reserve Bank of Cleveland, Working Paper No. 93-04, June 1993. ( https://doi.org/10.26509/frbc-wp-199304 )
• Bryan, Michael F., Stephen G. Cecchetti, and Rodney L. Wiggins II, “Efficient Inflation Estimation,” Federal Reserve Bank of Cleveland, Working Paper No. 97-07, August 1997. ( https://doi.org/10.26509/frbc-wp-199707 )
• Campos, Chris, Michael McMain, and Mathieu Pedemonte, “Understanding Which Prices Affect Inflation Expectations,” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2022-06, April 19, 2022. ( https://doi.org/10.26509/frbc-ec-202206 )
• Candia, Bernardo, Olivier Coibion, and Yuriy Gorodnichenko, “The Inflation Expectations of U.S. Firms: Evidence from a New Survey,” National Bureau of Economic Research Working Paper 28836, May 2021. ( http://www.nber.org/papers/w28836 )
• Cavallo, Alberto, Guillermo Cruces, and Ricardo Perez-Truglia, “Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments,” American Economic Journal: Macroeconomics 9, 2017, pp. 1-35. ( https://www.aeaweb.org/articles?id=10.1257/mac.20150147 )
• Coibion, Olivier, and Yuriy Gorodnichenko, “Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation,” American Economic Journal: Macroeconomics 7, 2015, pp. 197-232. ( http://dx.doi.org/10.1257/mac.20130306 )
• Crone, Theodore M., N. Neil K. Khettry, Loretta J. Mester, and Jason A. Novak, “Core Measures of Inflation as Predictors of Total Inflation,” Journal of Money, Credit and Banking 45 (March-April 2013), pp. 505-519. ( https://doi.org/10.1111/jmcb.12013 )
• D’Acunto, Francesco, Ulrike Malmendier, Juan Ospina, and Michael Weber, “Exposure to Grocery Prices and Inflation Expectations,” Journal of Political Economy 129, 2021, pp 1615-1639. ( https://doi.org/10.1086/713192 )
• Dietrich, Alexander M., Edward S. Knotek II, Kristian Ove R. Myrseth, Robert W. Rich, Raphael S. Schoenle, and Michael Weber. “Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations,” Federal Reserve Bank of Cleveland, Working Paper No. 22-20, June 2022. ( https://doi.org/10.26509/frbc-wp-202220 )
• Dogra, Keshav, Sebastian Heise, Edward S. Knotek II, Brent Meyer, Robert W. Rich, Raphael S. Schoenle, Giorgio Topa, Wilbert van der Klaauw, and Wändi Bruine de Bruin, “Estimates of Cost-Price Passthrough from Business Survey Data.” Federal Reserve Bank of Cleveland, Working Paper No. 23-14, June 2023. ( https://doi.org/10.26509/frbc-wp-202314 )
• Federal Open Market Committee, “Statement on Longer-Run Goals and Monetary Policy Strategy,” reaffirmed effective January 31, 2023. ( https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf )
• Federal Reserve Bank of Cleveland’s Center for Inflation Research. ( https://www.clevelandfed.org/center-for-inflation-research )
• Friedman, Milton, “The Role of Monetary Policy,” American Economic Review 58, 1968, pp. 1-17. ( https://www.jstor.org/stable/1831652 )
• Gagliardone, Luca, Mark Gertler, Simone Lenzu, and Joris Tielens, “Anatomy of the Phillips Curve: Micro Evidence and Macro Implications,” National Bureau of Economic Research, Working Paper 31382, June 2023. ( https://doi.org/10.3386/w31382 )
• Garciga, Christian, Edward S. Knotek II, Mathieu Pedemonte, and Taylor Shiroff, “The Survey of Firms’ Inflation Expectations.” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2023-10, May 22, 2023. ( https://doi.org/10.26509/frbc-ec-202310 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Indirect Consumer Inflation Expectations,” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2022-03, March 1, 2022a. ( https://doi.org/10.26509/frbc-ec-202203 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Indirect Consumer Inflation Expectations: Theory and Evidence,” Federal Reserve Bank of Cleveland, Working Paper No. 22-35, November 2022b. ( https://doi.org/10.26509/frbc-wp-202235 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation,” Federal Reserve Bank of Cleveland Working Paper No. 22-21R, March 2023. ( https://doi.org/10.26509/frbc-wp-202221r )
• Indirect Consumer Inflation Expectations (ICIE), Central Bank Research Association (CEBRA). ( https://cebra.org/indirect-consumer-inflation-expectations/ )
• Klenow, Peter J., and Benjamin A. Malin, “Chapter 6 – Microeconomic Evidence on Price-Setting,” in Handbook of Monetary Economics, vol. 3, ed. Benjamin M. Friedman and Michael Woodford, Amsterdam: North Holland, 2010, pp. 231-284. ( https://doi.org/10.1016/B978-0-444-53238-1.00006-5 )
• Lan, Ting, Lerong Li, and Minghao Li. 2023. “Matching Price Stickiness and MPC: Monetary Policy Implications,” manuscript, 2023.
• L’Huillier, Jean-Paul, and Raphael Schoenle, “Raising the Inflation Target: What Are the Effective Gains in Policy Room?” manuscript (revision of Federal Reserve Bank of Cleveland, Working Paper No. 20-16), May 18, 2023. ( https://people.brandeis.edu/~schoenle/research/raising_the_target.pdf )
• Lucas, Robert E., Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory 4, 1972, pp. 103-124. ( https://doi.org/10.1016/0022-0531(72)90142-1 )
• Mester, Loretta J., “Inflation and Monetary Policy: Six Research Questions,” keynote remarks, Federal Reserve Bank of Cleveland Conference on Inflation, Monetary Policy, and the Public, Cleveland, OH, May 30, 2014. ( https://www.clevelandfed.org/en/collections/speeches/2014/sp-20140530-inflation-and-monetary-policy-six-research-questions )
• Mester, Loretta J., “The Role of Inflation Expectations in Monetary Policymaking: A Practitioner’s Perspective,” European Central Bank Forum on Central Banking: Challenges for Monetary Policy in a Rapidly Changing World, Sintra, Portugal, June 29, 2022a. ( https://www.clevelandfed.org/en/collections/speeches/2022/sp-20220629-the-role-of-inflation-expectations-in-monetary-policymaking )
• Mester, Loretta J., “Inflation, Inflation Expectations, and Monetary Policymaking Strategy,” Distinguished Speaker Series, Massachusetts Institute of Technology, Golub Center for Finance and Policy, Cambridge, MA, September 26, 2022b. ( https://www.clevelandfed.org/en/collections/speeches/2022/sp-20220926-inflation-inflation-expectations-and-monetary-policymaking-strategy )
• Meyer, Brent, Guhan Venkatu, and Saeed Zaman, “Forecasting Inflation? Target the Middle,” Federal Reserve Bank of Cleveland, Economic Commentary Number 2013-05, April 11, 2013. ( https://doi.org/10.26509/frbc-ec-201305 )
• Meyer, Brent, and Saeed Zaman, “The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy.” Empirical Economics 57, 2019, pp. 603-630. ( https://doi.org/10.1007/s00181-018-1472-1 )
• Pedemonte, Mathieu, Hiroshi Toma, and Esteban Verdugo, “Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience,” Working Paper No. 23-04, Federal Reserve Bank of Cleveland, January 2023. ( https://doi.org/10.26509/frbc-wp-202304 )
• Phelps, Edmund S., “Phillips Curves, Expectations of Inflation, and Optimal Unemployment Over Time,” Economica 34, 1967, pp. 254-281. ( https://doi.org/10.2307/2552025 )
• Reis, Ricardo, “Losing the Inflation Anchor,” Brookings Papers on Economic Activity, Fall 2021, pp. 307-361. (Brookings conference draft available at: https://www.brookings.edu/wp-content/uploads/2021/09/Losing-the-Inflation-Anchor_Conf-Draft.pdf )
• Sara-Zaror, Francisca, “Expected Inflation and Welfare: The Role of Consumer Search,” manuscript, November 14, 2021. ( http://dx.doi.org/10.2139/ssrn.4127502 )
• Smith, Julie K., “Weighted Median Inflation: Is This Core Inflation?” Journal of Money, Credit and Banking 36, April 2004, pp. 253-263. ( https://www.jstor.org/stable/3839019 )
• Stock, James H., and Mark W. Watson, “Slack and Cyclically Sensitive Inflation,” Journal of Money, Credit and Banking 52(S2), December 2020, pp. 393-428. ( https://doi.org/10.1111/jmcb.12757 )
• Survey of Firms’ Inflation Expectations (SoFIE), Federal Reserve Bank of Cleveland. ( https://www.clevelandfed.org/indicators-and-data/survey-of-firms-inflation-expectations )
• Walsh, Carl E., “Inflation Surges and Monetary Policy,” Monetary and Economic Studies 40, Bank of Japan, November 2022, pp. 39-66. ( https://www.imes.boj.or.jp/research/papers/english/me40-4.pdf )
• Zaman, Saeed, “Cyclical versus Acyclical Inflation: A Deeper Dive,” Federal Reserve Bank of Cleveland, Economic Commentary, Number 2019-13, September 4, 2019. ( https://doi.org/10.26509/frbc-ec-201913 )

Suggested Citation

Mester, Loretta J. 2023. “Inflation: Four Questions Requiring Further Research to Inform Monetary Policy.” Speech, Closing Remarks, Inflation: Drivers and Dynamics Conference 2023-Federal Reserve Bank of Cleveland’s Center for Inflation Research and the European Central Bank-Frankfurt am Main, Germany.

Home — Essay Samples — Economics — Inflation — The Rise of Inflation Rate in the Us

The Rise of Inflation Rate in The Us

• Categories: American Government Economic Growth Inflation

About this sample

Words: 1605 |

Published: Jul 15, 2020

Words: 1605 | Pages: 4 | 9 min read

Table of contents

Introduction, financial measures in the us government's inflationary rise, recommedation, what are some factors that contribute to the rise in inflation, how did the inflation affect the market, implementation of additional monetary easing (so-called qe 3), purchase policies of mbs newly decided at fomc in september.

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• Economic News

The Fed Cares What You Think About Inflation

Al Drago / Bloomberg via Getty Images

Key Takeaways

• Federal Reserve officials closely watch surveys that show consumers' expectations for future price increases.
• If consumers and business owners believe price pressures will ease, then they generally behave in ways that make that happen, according to Fed officials. 
• Consumer expectations for inflation are beginning to come in line, giving Fed officials more hope that inflation can eventually be brought back down to target. 

When Federal Reserve officials meet to discuss inflation and interest rates at the end of the month, they will take into account many factors, like the Consumer Price Index (CPI) and the unemployment rate.

But there’s one data point Fed officials often highlight that might surprise you: what consumers like you think about inflation.

As Fed officials have crisscrossed the country talking about economic conditions and interest rates as of late, they have emphasized the importance of where consumers believe prices will be in the future.

“Inflation expectations, we think, are an important part of driving actual inflation and we want them to be at levels that are consistent with 2% inflation,” Federal Reserve Chair Jerome Powell said earlier this month at a Stanford University event.

Consumer Surveys Keep Tabs on Price Expectations

There are several places that the Federal Reserve can go to see what consumers are thinking about prices, including the University of Michigan’s Consumer Sentiment survey and the Conference Board’s Consumer Confidence survey. Each asks consumers what they think the inflation rate will be in the future.

As inflation shot up in 2022 to show year-over-year price increases of as much as 9%, so did consumer expectations that inflation would remain high. During that time, the University of Michigan survey showed consumers' year-ahead inflation expectations exceeded 5% for the first time since the 2008 recession and reached highs not seen since 1981.

Why Do Expectations Matter?

When consumers and businesses think higher inflation is ahead, they act accordingly .

“One of the funny things about economics is that people’s expectations—your expectation—for the future become self-fulfilling. So if all of us believe that inflation will be 2%, then we behave in a way that helps lead to inflation being 2%,” Minneapolis Fed President Neel Kashkari told a University of Montana audience earlier this month.

When businesses think inflation will remain high, they often set their prices to contend with that expectation. Conversely, workers will ask for larger pay increases to keep up with the inflation they predict is ahead.

“If price-setters and wage-setters in an economy believe that inflation will be at 2%, then that will actually happen,” Powell said. 

Expectations Appear To Be Falling in Line

Despite setting interest rates at 23-year highs , inflation hasn’t yet been tamed. In fact, recent reports have shown price pressures may be creeping back up. But there are some indications the Fed has at least successfully gotten consumers to pull back their inflation expectations. 

“Importantly, inflation expectations in the New York Fed’s Survey of Consumer Expectations are now again within their pre-COVID ranges at all horizons, consistent with other measures of inflation expectations,” New York Fed President John Williams said earlier this month.

And it’s not just consumers' expectations that the Fed follows, with Powell noting that officials also consider surveys of businesses, as well as other forecaster models and market indicators that can give information about the likely path of prices.

“All of those are saying that the public does believe—and it’s a good thing because it’s true—that inflation will go back down to 2%. So that’s very assuring,” Powell said. 

Fed Has to ‘Go All the Way’

Not only does the Federal Reserve consider what the public thinks about inflation, but officials are also mindful of how the public perceives the central bank's credibility. In other words, it’s important to the Fed that you believe it is serious about fighting inflation. 

In their remarks, Powell, Kashkari, and other officials said it is crucial the Federal Reserve hit its annual target of a 2% inflation rate for that reason. They’ve also argued against changing the Fed’s target to a higher number because that would undermine confidence in the central bank. 

“We have to go all the way. Because if we stop short, then you all are going to say, ‘maybe they will stop short next time,’ and that undermines confidence in the Fed,” Kashkari said.

YouTube. “ Stanford Graduate School of Business: 2024 Business, Government & Society Forum - Welcome and Opening Keynote .”

St. Louis Federal Reserve. “ University of Michigan: Inflation Expectation (MICH) | FRED .”

Minneapolis Federal Reserve. “ Neel Kashkari Town Hall at the University of Montana .”

New York Federal Reserve. “ Eclipse .”

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Our Inability to Predict Inflation Is an Embarrassment to Economics

By Peter Coy

Opinion Writer

We were surprised when inflation rose. We were surprised when inflation fell. And we were surprised again when inflation stopped falling. The message of all these surprises is that we — including professional economists — really don’t have a strong grasp on why prices go up and down.

The shakiness of our understanding is no small problem because inflation matters, a lot. A big reason President Biden is lagging in the polls is that voters, rightly or wrongly, blame his policies for the inflation surge of 2022, when the annual change in the Consumer Price Index briefly hit 9.1 percent. The Federal Reserve is so intent on getting inflation down to its 2 percent target that it’s risking a recession by keeping interest rates high.

Aside from those practical considerations: If we don’t understand inflation, then we also don’t truly understand anything else about the business cycle ( if there even is one ), because growth and inflation are intertwined.

I happen to think the stock and bond markets overreacted to the higher-than-expected increase last month in the C.P.I. that was reported this week, which to me looks more like a blip than a serious reversal. But I admit that I don’t know for sure. Nobody does.

When I wrote about our collective cluelessness in a blog post on Wednesday, the day the C.P.I. for March came out, I quoted Jerome Powell, the chair of the Federal Reserve, who likes to say that the Fed rate-setters are navigating by the stars under cloudy skies.

Since then I’ve started reading a new book by a Fed insider, Jeremy Rudd, that has made me think that things are worse than Powell’s nautical metaphor would indicate. Despite its bland title, “A Practical Guide to Macroeconomics,” Rudd’s book is a wide-ranging condemnation of academic macroeconomics for failing to generate advice and ideas that are useful to policymakers, such as Fed officials.

It’s common sense that inflation tends to go up when the economy is running hot because of the laws of supply and demand: When demand is strong and supply can’t keep up, prices rise to reset the balance. In the short run, then, high inflation goes along with low unemployment and low inflation goes with high unemployment. That inverse relationship is captured in the Phillips curve, which is a workhorse of the models used by most economic forecasters.

Nevertheless, few economists predicted inflation would rise as much as it did in 2021 and 2022, when demand was fueled by federal pandemic aid and supply was constrained by supply-chain bottlenecks. Among those who did warn of high inflation, few thought it would recede so quickly. Many thought it would take a long economic downturn to squeeze inflation out of the system, but the inflation rate fell below 4 percent by June 2023 even as the economy continued to produce lots of jobs.

That was surprising. The latest surprise is that the progress against inflation stalled right about then. This March the yearly change in the Consumer Price Index was 3.5 percent, which was up from 3.2 percent in February.

Rudd writes that the Phillips curve hasn’t been emitting useful signals. “Although the Phillips curve has been an object of fascination since it was first introduced, we have no compelling theory of inflation dynamics that would allow us to understand the Phillips correlation — or the historical shifts in the Phillips curve — on anything like a deep level,” he writes.

The fact that “we simply don’t know what caused the U.S. economy to transition into an inflation regime” like the one of 2021 and 2022 “is embarrassing from a professional standpoint,” Rudd writes, “because it highlights that we still understand close to nothing about how inflation works despite seven decades’ worth of research.”

Rudd has worked as a policy economist for the past 30 years at the Council of Economic Advisers, the Treasury Department and the Fed. He’s currently a senior adviser in the program direction section of the Fed’s Division of Research and Statistics. I emailed him and the Fed’s public relations staff seeking an interview, but didn’t hear back.

While mainstream theory says that wage increases tend to fuel inflation, that’s not what happened in the inflationary burst of the pandemic. Wage growth failed to keep up with prices, wrote the economists Ben Bernanke, of the Brookings Institution, and Olivier Blanchard, of the Massachusetts Institute of Technology, in a paper last year.

The two prominent exponents of mainstream macroeconomics warned, though, that “if current labor market conditions persist,” the contribution of wage growth to inflation “is likely to grow and will not subside on its own.”

Servaas Storm, a Dutch economist, criticized Bernanke’s and Blanchard’s warning in a recent article , arguing that U.S. workers don’t have the power to demand high wages because of the low rate of private-sector unionization ( 6.9 percent ). “The established New Keynesian models are of no use,” Storm, a senior lecturer of economics at Delft University of Technology, wrote. “The state of macro is not good.”

“Let me strongly disagree,” Blanchard, a former chief economist of the International Monetary Fund, emailed me. The Phillips curve has not died, he wrote. “Fundamentally, it is hard to believe that when the economy is overheating there is not going to be pressure of some sort on wages and prices.” He added: “That the relation is not trivial, and changes over time, does not negate its existence.”

At a high level, Blanchard’s rebuttal makes sense. Blanchard correctly warned in 2021 of the risk of inflation (though it turned out worse than he thought), and he did so using standard macroeconomic theory.

One problem with academic theories of inflation, though, is that they tend to depend on the estimation of numbers that can’t be directly observed, such as how fast the economy can grow without generating inflation and the “expected” rate of inflation. Who really knows how fast the economy can grow? Also, whose inflation expectations matter, and how can they be measured? It’s hard enough measuring observable phenomena, such as how much prices changed over the past month.

Paul Romer, who recently moved to Boston College’s Carroll School of Management from New York University’s Stern School of Business, once joked that unobservables are like phlogiston, an imaginary substance that chemists once posited to explain how fires go out.

In the absence of a strong theoretical explanation for inflation, Fed rate-setters fall back on things they can directly observe, such as price changes in various categories. This is known as data dependence, and it’s a good thing for the most part. The problem is that it’s backward-looking. The Fed and the rest of us would be better off with a theory that could reliably predict where inflation is going, not just where it’s been.

That’s what’s lacking. Rudd asks: “So how did academic macroeconomics become utterly incapable of giving sensible answers to important questions?”

The Readers Write

Your recent column implies that humans would be miserable in a world where A.I. took care of everything. But in societies with ruling, wealthy or aristocratic classes, slaves or servants often did all the tasks needed to keep things going, even parenting. Perhaps some aristocrats’ activities were vapid, meaningless and unsatisfying, but we also know that the elite were often competing in sports and games, writing sonnets, having complex love affairs, contemplating philosophic issues, etc. Maybe we’ll all be able to enjoy the leisure previously enjoyed by just a few.

Sally Ann Drucker Garden City, N.Y.

You write about a science fiction character who has manufactured 162,329 table legs. I worked for 18 months at a McDonald’s (between colleges) and I can tell you it felt like I flipped at least 162,330 burgers. I’ll bet there are folks working in assembly jobs that actually have manufactured that many table legs, radiators, car doors, wiring harnesses. It is the epitome of elitism to think that the average Joe/Josephine wouldn’t be thrilled to get a decade or two of life without problems.

Crystal Nipp Cottage Grove, Wis.

You ask, “What would life be like if artificial intelligence solved all your problems?” One thing it will never replace is sincere, mutual love shared with another living creature. Humans and, yes, animals. Life is made meaningful only with love. Let’s see A.I. replicate that. I’m not worried.

Margaret Petela Portland, Ore.

Cartoonist Al Capp somewhat anticipated the A.I. problem when he created the shmoo, a creature that took care of all mankind’s needs. Eventually the shmoos had to be captured and restricted to a small valley.

Paul Sonnecken Grosse Point, Mich.

The odds of humanity ever struggling with living in a perfect world are zero. Only a Western male would dare pose that hypothesis.

Phillip Schloss Chapel Hill, N.C.

Quote of the Day

“Craftsmanship entails learning to do one thing really well, while the ideal of the new economy is to be able to learn new things, celebrating potential rather than achievement.”

— Matthew B. Crawford, “Shop Class as Soulcraft: An Inquiry Into the Value of Work” (2009)

Peter Coy is a writer for the Opinion section of The Times, covering economics and business. Email him at [email protected] . @ petercoy

Essay on Inflation In Philippines

Students are often asked to write an essay on Inflation In Philippines in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Inflation In Philippines

What is inflation.

Inflation means the prices of things we buy are going up. In the Philippines, when prices rise, it becomes harder for people to afford food, clothes, and other items. This can happen when there’s too much money to spend but not enough goods, or when the cost to make products goes higher.

Inflation in the Philippines

The Philippines often experiences inflation. This can be due to natural disasters affecting crops, changes in global oil prices, or government actions. When inflation occurs, Filipino families might struggle to buy what they need, which can be tough for everyone.

Effects on Daily Life

Because of inflation, families in the Philippines might have to change how they spend money. They may buy less food or cheaper items to save money. Sometimes, even going to school or getting healthcare can become more expensive, making life challenging for many people.

250 Words Essay on Inflation In Philippines

Understanding inflation in the philippines.

Inflation means the increase in prices of things we buy, like food, clothes, and toys. In the Philippines, just like in other countries, prices can go up over time. This can make life hard for families, especially if they don’t have a lot of money.

Causes of Inflation

In the Philippines, inflation can happen for many reasons. Sometimes, if there’s a problem with growing food or if there’s a big storm, there might not be enough of it, and this can make prices go up. Also, if the money in the Philippines becomes less valuable compared to other countries’ money, things that come from other countries can become more expensive.

Effects of Inflation

When prices go up, it’s tough for people. They might not be able to buy as much with their money, and this can be stressful. Parents might have to work more to earn more money, and sometimes, kids might not get new toys or clothes as often.

What the Government Does

The government in the Philippines tries to control inflation. They can change how much money is in the economy or make rules about prices to help keep them from going up too fast. They do this because they want to make sure that people can afford what they need.

Inflation in the Philippines is a challenge that affects everyone. It’s important to understand why it happens and how it changes the way people live. While it can be tough when prices go up, the government works to manage inflation for the good of the country.

500 Words Essay on Inflation In Philippines

Inflation is when the prices of things we buy go up. Imagine you could buy a toy car for one peso last year, but this year the same car costs two pesos. That’s inflation: the money you have buys less than before. This can happen with toys, food, clothes, and almost everything. In the Philippines, like in many countries, inflation affects how people live because they need more money to buy the same things.

Causes of Inflation in the Philippines

In the Philippines, inflation happens for a few reasons. Sometimes, when there are not enough goods like rice or vegetables, prices go up because many people want these items but there aren’t enough for everyone. This is called “demand-pull inflation.” Another reason is “cost-push inflation,” which is when the cost to make products goes up. For example, if the price of gas increases, it costs more to deliver goods to stores, so the prices of these goods go up.

Also, when the money value in the Philippines goes down compared to other countries’ money, things we buy from other countries become more expensive. This is known as “imported inflation.”

Effects of Inflation on People

Inflation can make life hard for families. Parents have to spend more money on the same things, so they might have less money left for saving or for fun activities. Kids might notice that their allowance doesn’t buy as much candy or toys as it used to. If inflation is high, people might worry about prices going up even more and rush to buy things, which can make inflation worse.

How the Government Handles Inflation

The government of the Philippines tries to control inflation to make sure prices don’t rise too fast. The Central Bank of the Philippines can change interest rates, which is like changing the cost of borrowing money. If it’s more expensive to borrow money, people and businesses might spend less, and this can help slow down inflation.

The government can also use policies to help make sure there is enough supply of goods. For example, they can encourage farmers to grow more rice or make it easier for stores to get products from other countries when there’s not enough supply in the Philippines.

What Can People Do?

People can also do things to handle inflation. Families can plan their spending and look for better prices before buying something. It’s important to learn about money and how to use it wisely, especially when prices are going up.

Inflation in the Philippines is when prices rise and money buys less. It can be caused by not enough goods, higher costs to make products, or the country’s money value changing. Inflation affects how people live, but the government and people can take steps to manage it. By understanding what inflation is and how it works, even school students can be better prepared to deal with it in their daily lives.

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Bulletin – April 2024 Australian Economy Assessing Full Employment in Australia

18 April 2024

Alexander Ballantyne, Avish Sharma and Tim Taylor [*]

• Download 820 KB

Full employment is a longstanding objective of monetary policy in Australia, alongside price stability. The Reserve Bank Board aims to achieve the maximum level of employment consistent with low and stable inflation in the medium term. This article explains how RBA staff form an assessment of how labour market conditions stand relative to full employment. RBA staff draw on a range of labour market indicators, model-based estimates and outcomes for wages growth and inflation. Any single indicator tends to provide a partial view of the labour market and the level of each indicator that is consistent with full employment can change over time as the structure of the economy evolves. Ultimately, assessing how close the labour market is to full employment requires careful judgement, which the RBA sets out in its quarterly Statement on Monetary Policy .

Introduction

Monetary policy in Australia has traditionally aimed to maintain price stability and full employment. The price stability objective has, for some time, been defined in terms of the target range for consumer price inflation of 2–3  per cent. In contrast, the full employment objective does not have an equivalent numerical target. Following the 2023 Review of the RBA, the mandate for both objectives has been made more explicit in the updated Statement on the Conduct of Monetary Policy agreed between the Treasurer and the Reserve Bank Board, with the Board committing to regularly communicate ‘its assessment of how conditions in the labour market stand relative to sustained full employment’ (Treasurer and Reserve Bank Board 2023). An explanation about the role of full employment in monetary policy was provided in the February Statement on Monetary Policy (RBA 2024). This article explains in more detail how RBA staff form an assessment of labour market conditions relative to sustained full employment.

Full employment and monetary policy

What is full employment.

The Reserve Bank Board aims to achieve sustained full employment. This is the maximum level of employment that is consistent with low and stable inflation in the medium term; it can change over time as the structure of the economy evolves. [1]

At full employment, there is a balance between demand and supply in the labour market. This results in wages growth that is consistent with low and stable inflation in the medium term, taking into account the rate of productivity growth over time. Sustained full employment also coincides with balance in the markets for goods and services in the medium term, at which point firms’ ability to raise prices is also consistent with achieving the inflation target. That said, price and wage-setting frictions and disruptions in the production of goods and services can lead inflation to deviate from the inflation target for a period even when the economy is at full employment.

If there is too little demand for labour – because of a lack of aggregate demand for goods and services – there will be additional people unemployed or underemployed, which can have a large financial and social toll. This ‘spare capacity’ in the labour market also puts downward pressure on wages growth and inflation. By contrast, if the demand for labour is well above the available supply – because aggregate demand is strong – fewer people will be unemployed or underemployed. Hence, businesses will offer higher wages as they struggle to fill vacancies and experience high staff turnover. Although higher wages growth and employment are features of a strong and productive economy, when aggregate demand is in excess of productive capacity, they can become unsustainable and place upward pressure on inflation. Persistently elevated wages growth that flows into higher inflation is a clear sign that the labour market is tighter than full employment.

There are still people who are unemployed (i.e. they are looking for a job) or underemployed (i.e. in work, but wanting more hours) when the economy reaches full employment. This is, in large part, because of so-called ‘search and matching’ frictions, such as how easily jobseekers can find vacant positions and the extent of any skills or location mismatch between jobseekers and vacancies, which mean that people who are looking for jobs or additional hours may not find them immediately. [2]

Why is full employment a moving target?

We cannot directly observe the level of full employment, but we know it varies over time due to structural changes in the labour market. For example, over the past 30 years the employment-to-population ratio has steadily increased, while inflation has remained low and stable for most of that period (Graph 1). This suggests that the maximum number of people employed for a given population has increased over this period, alongside the increase in workforce participation. Our assessment of full employment needs to consider not only the number of people in employment relative to those who want to work, but also the number of hours that people currently work relative to the number they would like to work, which may also have changed over time. In general, labour demand must grow with the supply of labour to sustain full employment.

The balance of labour demand and supply consistent with full employment depends on structural features of the markets for labour, goods and services. For example, search and matching frictions lower the level of full employment. [3] These structural features can change over time. Government policies can influence both structural features of markets and labour supply decisions, and so influence the level of full employment. [4]

Monetary policy has little direct effect on labour supply or structural features of the job market, rather the focus of monetary policy is to minimise short- to medium-term economic cycles. But periods of unemployment can reduce workers’ earnings for several years afterwards and long spells can lead to skills atrophy, or cause workers to leave the labour force altogether, eroding the level of full employment that can be sustained (Borland 2020). So by acting to reduce the severity and duration of economic downturns, monetary policy may also be able to limit the extent of these so-called ‘hysteresis’ or ‘scarring effects’ on workers who lose their jobs during these episodes. [5] And by helping to achieve low and stable inflation, monetary policy supports strong and sustained employment growth in the long run. This is because it creates favourable conditions for households and businesses to make sound decisions about how to spend, save and invest.

Assessing how close the labour market is to full employment

We draw on a broad suite of indicators to inform our overall assessment of labour market conditions. This includes labour market data, survey measures, information from liaison with businesses, model-based estimates, and wages growth and inflation outcomes. Our assessment also draws on economic research and the views of academics, market economists, government agencies, international organisations and other central banks. We also engage with key stakeholders that represent the interests of workers and groups that typically have greater difficulty finding employment.

The main focus of our assessment is fluctuations in the balance of demand and supply in the labour market (spare capacity or, conversely, tightness) over the short-to-medium term; that is, deviations of labour market conditions from full employment. By removing slow-moving structural trends from a range of labour market indicators, we can isolate this short- to medium-term cycle. Models are particularly useful in extracting this cyclical signal in a systematic manner.

A key issue for assessing spare capacity in the labour market is determining how it relates to inflationary pressures. Structural changes in the markets for labour, goods and services can all affect the extent of inflationary pressure that a given set of labour market conditions generates. For example, a key component of price inflation is growth in unit labour costs, which are driven by both wages and productivity growth. A persistent change in productivity growth would mean that the rate of wages growth required for inflation to be sustainably in the target range must also change. As such, an assessment of the maximum level of employment that can be sustained with low and stable inflation is best done in the context of a broad view of economic developments.

Careful judgement is needed when making an overall assessment of labour market conditions relative to full employment from this broad set of inputs because each piece of information requires interpretation and only provides a partial view of the labour market. This judgement is explained in the quarterly Statement on Monetary Policy , to provide transparency around our assessment of full employment.

How labour market indicators inform our assessment

There are a wide range of economic indicators that capture different features of the labour market and respond in different ways to the business cycle. These indicators can be broadly summarised as primarily capturing either movements in labour demand, supply, or spare capacity. However, indicators tend to overlap categories because they will reflect both demand and supply forces. Wages growth and consumer price inflation also form an important part of the indicators analysed, though they can also reflect developments outside the labour market. Judgement is required in considering the factors that drive changes in each of these indicators.

Labour demand

Indicators such as the number of job advertisements, job vacancies and measures of firms’ employment intentions from business surveys and the RBA’s liaison program provide information on the demand for new employees (Graph 2). These indicators provide a relatively timely read on firms’ labour demand and employment growth, helping to identify turning points in labour market conditions (Edwards and Gustafsson 2013). They also reflect the balance between labour demand and labour supply. For instance, the large increase in vacancies during the pandemic partly reflected a shortage of suitable applicants, such as the pandemic-related decline in temporary migrants affecting industries like hospitality.

Labour supply

Changes in the participation rate, population growth and average hours worked affect labour supply and therefore the extent of any spare capacity (Graph 3). [6] These indicators affect the level of full employment since they determine the pool of available labour hours, and so the level of employment that is consistent with low and stable inflation. Population growth adds to labour demand, as well as supply.

Movements in these indicators reflect both structural and cyclical forces. The steady increase in the participation rate over many decades reflects longer run structural trends, such as the increase in female labour force participation and an increased tendency for workers to retire later. Population growth is affected by changes to life expectancy, birth rates and migration. The decline in average hours worked reflects shifts in work preferences and an increase in the part-time share of employment associated with structural changes in the economy and labour market reforms in the 1980s and 1990s.

Labour supply also responds to the economic cycle. For example, when labour demand is strong, more people may be willing to work additional hours because wages growth tends to be stronger. In addition, more people tend to be drawn into the measured labour force when demand is strong. [7] More generally, as with other labour market indicators, it can be difficult to disentangle the cyclical and structural factors at play and obtain a clean read of the extent of labour supply that is consistent with full employment.

Labour market spare capacity

There are a number of measures of spare capacity (or labour market tightness) that are particularly useful for assessing the balance of labour demand and supply.

The unemployment rate has traditionally been the key measure of labour market spare capacity. However, structural trends in the labour market mean that the unemployment rate that is consistent with full employment has changed over time and will likely continue to do so. These structural factors may be driven by changes in the composition of labour underutilisation, wage-setting practices, welfare systems and labour market regulation. There are various ways to separate these structural changes in the unemployment rate from the cyclical moves that are most relevant for monetary policy. Economic models are particularly helpful in this respect and are discussed further below.

More detailed components of unemployment add colour to the picture of spare capacity and are affected differently by cyclical and structural developments. For instance, movements in unemployment differ depending on the duration of unemployment experienced by jobseekers. In fact, movements in the rate of medium-term unemployment – those that have been unemployed for between four and 52 weeks – better reflect cyclical labour market conditions and are most relevant for wages growth, whereas the long-term unemployment rate is more related to structural factors (Ballantyne, De Voss and Jacobs 2014). The youth unemployment rate also tends to respond more to cyclical conditions (Graph 4; Dhillon and Cassidy 2018).

Broader measures such as the hours-based underutilisation rate are important for a full picture of labour market spare capacity. The unemployment rate is a useful headline statistic, but it is a narrow measure, excluding workers who currently have jobs, but would like to work more hours – the underemployed. To account for the total volume of spare capacity in hours, we look at the hours-based underutilisation rate, which captures the shortfall of hours worked due to both unemployment and underemployment. Like unemployment, underutilisation measures also have structural trends that need to be considered when interpreting the data (Graph 5).

Job opportunities and the rate at which people move between jobs also provide an indication of labour market tightness. The number of vacancies relative to the number of unemployed people captures the number of job opportunities for each person looking for work. An increase in this ratio indicates a tighter labour market. That could be due to higher labour demand leading to higher vacancies, or because of increasing labour shortages or skill mismatches. Rates of hiring, and involuntary and voluntary job separation can help us understand changes in the amount of spare capacity more deeply. Rates of job switching are also linked with tightness in the labour market and are positively associated with aggregate wages growth (Black and Chow 2022). Survey data that report the extent to which labour is a constraint on output for firms also provides an indication of tightness.

Wage and price indicators

Price and wage indicators, in combination with productivity, provide useful information on the overall balance of demand and supply in the labour market. Detailed wages data can be useful to gauge the breadth of imbalance and whether particular sectors or occupations are tighter than others. Consumer price inflation outcomes are also informative in gauging the balance of demand and supply in the market for goods and services, which in turn affects conditions in the labour market. Inflation, wages and labour costs (i.e. wages accounting for productivity) are commonly used in models to generate statistical estimates of full employment (see below).

However, inflation can move for reasons other than imbalances between labour demand and supply. For instance, inflation can be affected by changes in the production of goods and services unrelated to labour markets, including disruptions in foreign supply chains for goods. The relationship between labour market conditions, wages and inflation may also be subject to lags; for example, a large share of Australian wages is set by annually reviewed award rates or by multi-year enterprise bargaining agreements, both of which can moderate the frequency of wage changes. Given these complications, some judgement is required when determining how wages growth, inflation and productivity inform an assessment of full employment.

Drawing key indicators together

Any single indicator provides only a partial view of spare capacity in the labour market. Looking at the pattern across a range of indicators provides a more comprehensive picture. Graph 6 provides a visual summary of some of the key indicators. It compares the latest observation of each indicator (blue dots) with the middle 80 per cent of observations since 2000 (grey bars) for historical context. It suggests that the labour market remains tight but has eased relative to when the labour market was very tight in late 2022 (shown as orange dots, which for many indicators are close to their tightest level on record). The easing in the labour market since late 2022 is most evident in measures that tend to be leading indicators, such as firms’ employment intentions.

In practice, there is no mechanical link between this summary and our overall assessment of labour market conditions relative to full employment, which is set out in the quarterly Statement on Monetary Policy . Although history may be a guide to finding the full employment level of these variables, there are several limitations with this approach that mean the relevant benchmark is uncertain and so judgement is required when interpreting the graph.

One limitation is that these variables may have trended up or down over time, so looking at the current level of an indicator relative to history can be misleading. Focusing on the values of these indicators when the economy was previously near full employment is also problematic since the level of full employment changes over time and is uncertain itself. For example, the underemployment rate has trended upward over time, along with the part-time share of employment (Graph 7; Chambers, Chapman and Rogerson 2021). This has occurred alongside structural changes to the Australian economy, such as the shift to a greater employment share in services industries and labour market reforms that have made it easier for firms to adjust the working hours of their employees (Bishop, Gustafsson and Plumb 2016). So the very low level of underemployment in the 1970s is not a good guide for the level of underemployment consistent with full employment today. We have models that can help us extract the cyclical signal from the trend in labour market indicators, but they are not available for every variable.

Another reason judgement is required when making comparisons across the indicators is because the distribution of historical outcomes varies from one indicator to the next. For example, unemployment spikes upwards during downturns, but tends to move down gradually during economic expansions. Because of this, and a longer run downward trend over recent decades, outcomes of the unemployment rate tend to be located towards the right-hand side of Graph 6. This contrasts with the recent behaviour of the vacancies-to-unemployment ratio, which increased sharply as the labour market tightened. As a result, movements in this ratio have been greater in magnitude lately, while the position of typical levels of this indicator are much further to the left than for other indicators. [8]

Finally, the summary in Graph 6 should not be thought of as being static. The indicators on the graph may change as further work is done, new data sources become available or alternative data sources become better suited to illustrating the state of the labour market. Microdata are increasingly being used to unlock perspectives on the labour market that were not previously available, and more indicators built on these data could be constructed in the future.

How models inform our assessment

By exploiting historical relationships between labour market indicators, models help us synthesise information into quantitative assessments of labour market conditions. They are particularly useful for capturing the relationship between the labour market, wages growth and inflation. However, there is considerable uncertainty around these model-based assessments, as there is only so much information models can provide about unobservable concepts like full employment. Even so, models are a useful input into our overall assessment of labour market conditions.

Separating trend and cycle

Models rely on a combination of economic theory and statistical techniques to separate spare capacity (cyclical variation in the data) from any structural trends and noise (such as measurement error). This provides a formal framework for analysing the history of a single or several labour market indicators, and the output can be cross-checked against what we know about historical developments to ensure consistency. The structural trends extracted from the data may be of economic interest themselves, but primarily allow for a cleaner read on how current conditions differ from a labour market with labour supply and demand in balance. For example, underutilisation typically ranged between 5½ per cent and 8 per cent over 2000–2024 (i.e. the light grey range in Graph 6), but our models suggest that the rate of underutilisation that can be sustained without creating inflationary pressure was at the lower end of this range at around 6–7  per cent at the end of 2023.

Most models used to assess spare capacity in the labour market exploit historical relationships between unemployment or hours-based underutilisation and other variables measuring inflationary pressures. For example, there is typically an inverse relationship between the hours-based underutilisation rate and wages growth or inflation in the short term – this is a version of the Phillips curve (Graph 8). [9] Based on this relationship, our models use movements in wages or prices to infer the gap between the hours-based underutilisation rate and its full-employment level. If we see high wages growth or upward pressure on inflation, it suggests a tight labour market with strong labour demand relative to supply, and so the current hours-based underutilisation rate is likely to be below its full-employment level. If we see low wages growth or downward pressure on inflation, it suggests that there is spare capacity in the labour market with weak labour demand relative to supply, and so the current hours-based underutilisation rate is likely to be above its full-employment level.

The non-accelerating inflation rate of unemployment or NAIRU

Many central banks, including the RBA, have traditionally used Phillips curve models to estimate spare capacity in the labour market, in particular a type of Phillips curve model that estimates a non-accelerating inflation rate of unemployment (NAIRU). [10] The (unobservable) NAIRU is often thought of as the unemployment rate at which inflation is neither rising nor falling, and is estimated using a specific set of assumptions. A key feature is that it incorporates a role for inflation expectations into the Phillips curve; if unemployment remains too low for too long, inflation expectations will rise, which risks ingraining higher rates of inflation. In this way, any attempt to push unemployment permanently lower than the NAIRU will lead to ever increasing rates of inflation.

However, the way the NAIRU is modelled has evolved since it was introduced in the 1970s. One innovation is the extension to broader measures of spare capacity, such as the non-accelerating inflation rate of labour underutilisation (NAIRLU) that uses the hours-based underutilisation rate instead of unemployment. A more fundamental refinement has been the treatment of inflation expectations. In the form currently implemented at the RBA, the NAIRU models measure the rate of unemployment that would be consistent with actual inflation being in line with expected inflation. That is, when unemployment is at the NAIRU, the models predict that inflation will drift from its current rate towards inflation expectations and then remain stable. (The same holds for the underutilisation-based NAIRLU models.) In this framework, it is only when inflation expectations become unanchored that continually rising inflation is possible, so the ‘non-accelerating’ part of the name does not describe the modern application well. The models do not mechanically require unemployment above the NAIRU for inflation to fall from a high level back towards target if inflation expectations remain anchored.

Because we cannot observe the NAIRU directly, we use statistical models to estimate it based on the relationships between inflation, labour costs and the unemployment rate. If the unemployment rate declines and inflation does not increase by as much as historical relationships would suggest, then model estimates of the NAIRU will decline, all else equal. This has been broadly the case over the past two decades, with estimates of the NAIRU declining gradually by roughly 2 percentage points. In today’s labour force, that equates to a little over 290,000 additional workers that can be sustainably employed.

NAIRU models are a useful starting point and there is extensive literature about them; however, as with all models, there are limitations and critiques. [11] In particular, the estimates can be sensitive to the model details, are prone to revision as new data come in, and have large uncertainty around them. The structural determinants of the NAIRU are not modelled, and the models do not provide forecasts of how the NAIRU might change in future. In addition, the NAIRU models used in the RBA do not specify how inflation expectations will evolve – this is of crucial importance to the inflation outlook and is addressed in other models.

Recently developed NAIRU and NAIRLU models by the RBA take greater signal from wage outcomes over inflation outcomes and incorporate a more explicit role for productivity growth. But all of the model estimates have a wide band of uncertainty. Graph 9 shows the range of uncertainty around one particular model that feeds into our suite of NAIRLU models, which is fairly typical of the uncertainty around the central estimates of other suite models.

A suite of models for inferring spare capacity

Different models will have different strengths and weaknesses, and no model sufficiently captures all dimensions of labour market spare capacity. We use a suite of models to capture a range of perspectives, which extend beyond the NAIRU and NAIRLU framework. The suite includes models developed within the RBA and models developed externally. [12] We look at model estimates of spare capacity in terms of the ‘gaps’ between the current unemployment and underutilisation rates and the model-based estimates of their full-employment rates (Graph 10). The estimates suggest that the labour market remains tight, but has eased relative to its peak.

We have been further developing our modelling suite to both refine our estimates and broaden the frameworks used. For example, a recently developed model incorporates information from a wider range of labour market indicators, including leading indicators of labour demand like vacancies and job advertisements. The suite of models will continue to evolve.

The range of estimates in Graph 10 covers the central estimates from the selection of models in our suite, but does not capture the uncertainty around each estimate. To provide a view from the models that accounts for all of the most important forms of uncertainty, we can look at the implied probability in each model that there is spare capacity in the labour market (i.e. the probability that the current rate of unemployment or underutilisation is above its sustainable level; Graph 11). A probability of 50 per cent broadly accords with a labour market that is in balance, according to the models. A simple average across the models suggests that the probability that the labour market was operating with spare capacity at the end of 2023 is modest, around 10 per cent based on most of the models of unemployment and around half of that based on hours-based underutilisation.

Assessing the level of full employment consistent with low and stable inflation is an important task for central banks. Staff at the RBA consider a wide range of inputs to form an overall assessment of the (unobservable) level of full employment. This includes using various labour market indicators, and models that combine information on labour market conditions and inflationary pressures based on economic theory. However, simply looking at the current level of indicators relative to history can be misleading and there may also be developments that models do not fully capture. As a result, careful judgement is required to weight all available information to assess how close the labour market is to full employment.

Alexander Ballantyne and Avish Sharma are from Economic Analysis Department and Tim Taylor contributed while on secondment in Economic Group. They would like to thank Ewan Rankin, Nick Stenner, Matt Read, Tom Rosewall, Marion Kohler, David Norman, Michelle Lewis, Sue Black, Lynne Cockerell, Sarah Hunter, Chris Kent, Brad Jones, Jeff Borland and Anthony Brassil for comments on this article. [*]

Full employment has a long history in Australia and internationally, but there is no universally accepted definition and there are subtle differences between definitions used by fiscal and monetary authorities. Nonetheless, the definition used in the Statement on the Conduct of Monetary Policy is consistent with that used by several peer central banks. [1]

There are also other factors that can affect the amount of unemployment that occurs when the economy is at full employment, such as market power, industrial relations regulation and social support systems. [2]

For example, changes in the patterns of demand or production can require workers with a different skill set to what are currently available, which increases the structural mismatch in the labour market and lowers full employment. [3]

The Australian Government (2023) has released a White Paper setting out its ‘inclusive’ full employment objective – to broaden labour market opportunities and to lift the level of employment that can be sustained over time. [4]

A sustained strong labour market might permanently increase labour supply by encouraging more people into the workforce and providing opportunities to gain new skills and experience. The extent to which this happens remains an open question. [5]

People’s preferred hours of work will also affect labour supply. However, detailed data on the preferred hours of work for those not in the labour force is currently not available, so it is difficult to gauge total potential hours in the economy. [6]

There are a large group of potential workers who are not counted as part of the labour force but wish to work. These individuals typically do not meet the Australian Bureau of Statistics’ definition of unemployment because they are either not immediately available or not actively searching for a job. But these potential workers represent another source of labour supply and their flows into and out of the labour force in each month are large (Evans, Moore and Rees 2018; Gray, Heath and Hunter 2005). Measuring this broader group of potential workers remains a challenge. [7]

The choice of the historical range shown in Graph 6 is also a judgement call and can influence any inferences made. Increasing the historical range means the variables are more susceptible to structural trends, whereas a shorter range may mean there is less cyclical variation in the indicators. [8]

The Beveridge curve, which shows that the unemployment rate is inversely related to the vacancy rate, is the other most commonly used framework for modelling full employment. [9]

Central bank literature on the NAIRU includes: Gruen, Pagan and Thompson (1999); Cusbert (2017); Crump, Nekarda and Petrosky-Nadeau (2020); Jacob and Wong (2018). [10]

Further literature on the NAIRU includes: Gordon (1997); Staiger, Stock and Watson (1997); Espinosa-Vega and Russell (1997); Ball and Mankiw (2002). [11]

External estimates have also been used as part of the suite, primarily those produced by the OECD; however, the OECD has discontinued updating their estimates and so they are not included here. [12]

Australian Government (2023), ‘Working Future: The Australian Government’s White Paper on Jobs and Opportunities’, September.

Ball L and NG Mankiw (2002), ‘The NAIRU in Theory and Practice’, Journal of Economic Perspectives , 16(4), pp 115–136.

Ballantyne A, D De Voss and D Jacobs (2014), ‘ Unemployment and Spare Capacity in the Labour Market ’, RBA Bulletin , September.

Bishop J, L Gustafsson and M Plumb (2016), ‘ Jobs or Hours? Cyclical Labour Market Adjustment in Australia ’, RBA Research Discussion Paper No 2016-06.

Black S and E Chow (2022), ‘ Job Mobility in Australia during the COVID-19 Pandemic ’, RBA Bulletin , June.

Borland J (2020), ‘Scarring Effects: A Review of Australian and International Literature’, Australian Journal of Labour Economics , 23(2), pp 173–187.

Chambers M, B Chapman and E Rogerson (2021), ‘ Underemployment in the Australian Labour Market ’, RBA Bulletin , June.

Crump RK, CJ Nekarda and N Petrosky-Nadeau (2020), ‘Unemployment Rate Benchmarks’, Finance and Economics Discussion Series No 2020-072.

Cusbert T (2017), ‘ Estimating the NAIRU and the Unemployment Gap ’, RBA Bulletin , June.

Dhillon Z and N Cassidy (2018), ‘ Labour Market Outcomes for Younger People ’, RBA Bulletin , June.

Edwards K and L Gustafsson (2013), ‘ Indicators of Labour Demand ’, RBA Bulletin , September.

Espinosa-Vega MA and S Russell (1997), ‘History and Theory of the NAIRU: A Critical Review’, Federal Reserve Bank of Atlanta Economic Review , Second Quarter.

Evans R, A Moore and D Rees (2018), ‘ The Cyclical Behaviour of Labour Force Participation ’, RBA Bulletin , September.

Gordon RJ (1997), ‘The Time-Varying NAIRU and its Implications for Economic Policy’, Journal of Economic Perspectives , 11(1), pp 11–32.

Gray M, A Heath and B Hunter (2005), ‘The Labour Force Dynamics of the Marginally Attached’, Australian Economic Papers , 44(1), pp 1–4.

Gruen D, A Pagan and C Thompson (1999), ‘ The Phillips Curve in Australia ’, RBA Research Discussion Paper No 1999-01.

Jacob P and M Wong (2018), ‘Estimating the NAIRU and the Natural Rate of Unemployment for New Zealand’, Reserve Bank of New Zealand Analytical Note No AN2018/04.

RBA (Reserve Bank of Australia) (2024), ‘ Chapter 4: In Depth – Full Employment ’, Statement on Monetary Policy , February.

Staiger D, JH Stock and MW Watson, ‘The NAIRU, Unemployment and Monetary Policy’ , Journal of Economic Perspectives , 11(1), pp 33–49.

Treasurer and Reserve Bank Board (2023), ‘ Statement on the Conduct of Monetary Policy ’, 8 December.