Answer to Question #26269 in Economics of Enterprise for japhet
discuss inflation under the following headings: (a) how it is measured (b) main causes thereof (c) reasons for inflation targeting
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. There are two main price indexes that measure inflation: •Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics. •Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics. Targeting is an economic, fiscal and monetary policy of the state on the target management of major economic indicators in the medium term. A crucial role in this process belongs to the Central Bank, which sets the target level of inflation, and uses it to achieve all possible leverage in the economy. The reasons of targeting inflation are adoption of inflation frameworks (a new tax on goods and services (indirect tax, like the value added tax), which could lead to supply shock , for which it was able to follow a jump in inflation. Instead, the emergence of the tax has led to only a one-time increase in the price level, ie, happened two or three times the increase in wages and prices, which could cause a sustained rise in inflation); refusion of exchange rate mechanism limitations (devaluation under normal conditions would stimulate inflation, directly affecting the increase in export and import prices, which would lead to the demands of higher wages and an increase in producer prices).