Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services. A classic example is the Great Inflation of the Roman Empire. Successive emperors replaced a steadily increasing fraction of the silver in their ancient currency, the denarius, with base metals like bronze or copper. As a result prices rose inexorably despite repeated attempts to restrain them through legislation. Diocletian, rather than taking responsibility for the debasement, attributed the rapid inflation of his day to the avarice of his subjects. His famous edict of a.d. 301 threatened with death any vendor who charged prices exceeding official limits. But inflation ran along unhindered for another century until an alternative currency, an undepreciated gold coin known to Shakespeare as the bezant, became the customary unit of account, spreading throughout Europe and lasting well into the Middle Ages.
In modern times inflation continues to be blamed on private greed, and governments still seek to restrain it by decree, sometimes even devaluing their currencies as they do so. We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services.
In modern times inflation continues to be blamed on private greed, and governments still seek to restrain it by decree, sometimes even devaluing their currencies as they do so. We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services.
Other popular indicators of inflation include producer prices (formerly known as wholesale prices) and unit-value indexes for imports and exports. As we move back through the distribution chain from the consumer toward the supplier of raw materials, a more jumpy picture of inflation is revealed at each step. Commodities, whose prices can be monitored continuously on centralized exchanges, and which are easy to measure, are the most volatile indicators of all. An index of commodity prices, when plotted on a graph, looks much like an index of stock prices. But its ups and downs are significant; it provides warning one or even two years ahead of movements in the consumer price index.
In the news media, discussion of inflation often takes a "bottom up" view. Each month's change in the CPI can be, and is, split up into dozens of components, such as food, energy, and housing. It is tempting to see the sectors where prices rose the most as causes of the observed inflation. Sometimes policymakers speculate that if "price pressure" in those areas could be relieved, overall inflation could be reduced.
This way of looking at inflation is mistaken. The prices of some items always are rising or falling relative to others. This is a natural feature of the way a market economy adapts to changes in supply or demand. Rapid price increases within a single sector, though often labeled "sectoral inflation," are partly the result of an adjustment in relative prices and partly a manifestation of the overall inflation rate. They may have no causative significance whatever. When we watch the tide come in at the beach, we know that it is not caused by the waves, however forceful they may be. Inflation is not simply the sum total of a collection of independent price changes, as the arithmetic of the CPI implies. It is the degree to which all of those prices move in concert.
This way of looking at inflation is mistaken. The prices of some items always are rising or falling relative to others. This is a natural feature of the way a market economy adapts to changes in supply or demand. Rapid price increases within a single sector, though often labeled "sectoral inflation," are partly the result of an adjustment in relative prices and partly a manifestation of the overall inflation rate. They may have no causative significance whatever. When we watch the tide come in at the beach, we know that it is not caused by the waves, however forceful they may be. Inflation is not simply the sum total of a collection of independent price changes, as the arithmetic of the CPI implies. It is the degree to which all of those prices move in concert.
(to be continued..)
No comments:
Post a Comment