Understanding

Inflation: A
Comprehensi e O er
What is infl ation and why does it matter? Infl ation aff ects

iew
consumers, businesses, and the economy. This presentation
covers the definition, types, causes, and control measures of
infl ation. Gain a comprehensive understanding of this critical
economic concept.

By Jasvindar Singh

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Defining Inflation
Inflation Defined Exampl
e
Infl ation is a sustained increase in the general The US CPI increased 3.4% in April 2024 year-over-
price level. I t is measured by the Consumer Price year, indicating rising prices.
Index (CPI).

The CPI tracks changes in prices of a basket of

goods and
services. The GDP Deflator is a broader measure.

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Measuring
Inflation
CPI Calculation
CPI = (Cost of basket in current year / base year) *
100.

Core Inflation
Excludes volatile food and energy prices to provide a
stable view.

Producer Price Index (PPI)

Measures price changes from the producer's
perspective.

Chain-Weighted CPI
Adjusts for changing consumer behavior patterns.

Core CPI rose 3.6% year-over-year. 3

Types of Inflation:
Demand- Pull
Increase Limite Price
d d Increas
Demand Supply e
Deman "Too much Occurs
d money during
exceeds chasing too economic
supply. few goods". booms.

Increased government spending during the pandemic is an

example of demand-pull inflation.

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Types of Inflation: Cost-
Push
Rising Supply
Costs Issues
Increased production Supply chain
costs. disruptions.

Commodity Wage
Shocks Hikes
Commodity price Wage
shocks. increases.

Rising production costs are passed to consumers. Oil price spikes increase transportation costs. Wage
- price spiral
intensifies inflation.

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Causes of Inflation: Monetary
Policy
Increase
Money
Increase money
supply Lower Rates
Lower interest
rates
More
Spending
Encourage
spending

Expansionary monetary policy increases money supply. Lower interest rates encourage borrowing.
Quantitative easing
adds liquidity. Milton Friedman said infl ation is always a monetary issue.

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Causes of Inflation: Fiscal
Policy
Got Tax Fiscal
Spending Cuts Deficits
Increased spending Tax cuts stimulate Lead to increased
without revenue. demand. borrowing.

Government spending and taxation policies contribute to infl ation. Fiscal deficits can lead to increased
borrowing and inflation.

7
Causes of Inflation: Supply
Shocks
Unexpected Production Higher Input
Eents Disruptions Costs

Unexpected events disrupt production or supply chains. Higher input costs are passed to consumers. The
Russia-Ukraine
war impacted global energy prices.

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Methods to Control
Inflation: Monetary
Policy
Reduce Supply
Reduce money
supply.

Raise Rates
Increase interest
rates.

Discourage Spending
Discourage borrowing.

Contractionary monetary policy reduces money supply. Higher

interest rates discourage borrowing and spending. The target
infl ation rate is 2%.

9
Methods to Control
Inflation: Fiscal
Policy
Austerity Measures Reduce government
spending.

Tax Increases Curb demand.

Supply-Side Policies Increase productivity.

Austerity measures reduce government spending. Tax

increases curb
demand. Reducing the federal defi cit can cool down the
economy.

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