Key Points

Inflation refers to the economic phenomenon of sustained and universal rise in prices.

Inflation rate = (current price level- base price level) / base price level * 100%.

According to the causes, inflation is generally divided into three types: demand-pull inflation, cost-push inflation, and structural inflation.

Concept Explanation

In theory, inflation refers to the economic phenomenon of the depreciation of currency and the sustained and universal rise in prices caused by the excess circulation of currency over actual demand, and its essence is that social total demand is greater than social total supply.

From the perspective of economic performance, inflation refers to a state of the economy in which prices of general goods and services rise comprehensively, sustainably, and significantly. Inflation has the following main characteristics:

First, it refers to the rise in the prices of general goods and services, rather than the prices of stocks, bonds, and other financial assets;

Second, it refers to the comprehensive rise in prices, that is, the prices of general goods and services rise comprehensively, rather than the rise in the prices of specific goods and services or the price level in some regions;

Third, it refers to the sustained rise in price levels, rather than occasional or short-term price increases.

Fourth, it depends on whether the money supply is too large.

Measuring inflation

The cost of living for consumers depends on the prices of many goods and services, as well as the percentage of these things in the family budget. To measure the average cost of living for consumers, government departments conduct surveys of certain households to determine the basket of goods that people usually buy and track the purchase costs of this basket of goods over a period of time.

In a given period of time, the ratio of the price of this basket of goods to the price of the base year is the consumer price index (CPI), and the percentage change of the CPI is the consumer price inflation rate, which is the most widely used inflation indicator.

Inflation rate = (current price level - base price level) /base price level * 100%

For example, if the CPI in the base year is 100 and the current CPI is 110, then the inflation rate in this period is 10%.

Classification of inflation

With the acceleration of economic globalization, the causes and manifestations of inflation are also changing. However, currently, inflation is generally divided into three types according to the causes and manifestations of inflation: demand-pull inflation, cost-push inflation, and structural inflation.

Demand-pull inflation

This analyzes the causes of inflation from the perspective of total demand and believes that the cause of inflation lies in the excessive growth of total demand and the insufficient total supply, that is, "too much currency chasing too little goods," or "the demand for goods and services exceeds the supply that can be obtained at current prices, so the general price level rises."

Cost-push inflation

This analyzes the causes of inflation from the perspective of total supply. Supply is production, and according to the production function, production depends on costs. Therefore, from the perspective of total supply, the cause of inflation lies in the increase in costs. The increase in costs means that only with a price level higher than before can the same level of output as before be achieved, and this price increase is the cost-push inflation.

Structural inflation

Structural inflation refers to the phenomenon of price increases when the demand for certain products in certain sectors is excessive under conditions of not excessive overall demand, resulting in price increases for certain products, such as steel, pork, real estate, edible oil, etc. If structural inflation is not effectively suppressed, it may evolve into cost-push inflation, causing overall inflation.