Definition: Sustained increase in general price level. Inflation that is decreases is disinflation.

Measurement

Consumer price index: a basket of goods that are considered typical. Monitor the price of this basket over subsequent years to derive the rate of inflation.

Problems

• Different consumers have different tastes.
• Varies across regions
• Does not account for quality changes
• Difficult to compare over long periods of time

Causes

Split into the two categories that can easily be drawn on AD/AS diagram: Demand-pull inflation and cost-push inflation. Cost is supply.

Costs

Here’s a relationship, units in ($\Delta \%$): $realincome=nominalincome-inflation$ Losers: Unfairly redistributes income.

• People who receive fixed income wages, or increase less rapidly than the rate of inflation
• Holders of cash
• Savers
• Lenders Winners: Basically the opposites
• Borrowers
• Payers of fixed things.

But overall, it creates uncertainty, which leads to low investment and therefor lower economic growth.

There can also be Hyperinflation. Ultimately though, there needs to be stable rate of inflation to prevent economy from going into Deflation. Usually this is around the 2-3% level.