inflation

inflation, in economics, persistent and relatively large increase in the general price level of goods and services. Its opposite is deflation, a process of generally declining prices. The U.S. Bureau of Labor Statistics produces the Consumer Price Index (CPI) yearly, which measures average price changes in relation to prices in an arbitrarily selected base year. While the CPI is usually considered the most reliable estimate of inflation, some economists have questioned whether it overstates inflationary trends.

Inflation results from an increase in the amount of circulating currency beyond the needs of trade; an oversupply of currency is created, and, in accordance with the law of supply and demand, the value of money decreases. Deflation is brought about by the opposite condition. In the past, inflation was often due to a large influx of bullion, such as took place in Europe after the discovery of America and at the end of the 19th cent. when new supplies of gold were found and exploited in South Africa. In modern times wars are the most common cause of inflation, as government borrowing, the increase in the money supply, and a diminished supply of consumer goods increase demand relative to supply and thereby cause rising prices.

Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages diminish. Stockholders make gains—often illusory—from increased business profits, but bondholders lose because their fixed percentage return has less buying power. Borrowers also gain from inflation, since the future value of money is reduced. Deflation, which historically has occurred in the downward movement of the business cycle, lowers prices and increases unemployment through the depression of business. Persistent deflation in Japan, beginning in the early 1990s, has resulted in a drop in consumption, record unemployment, and general economic stagnation. An unusually steep and sudden rise in prices, sometimes called hyperinflation, may result in the eventual breakdown of an entire nation's monetary system. The most notable example is Germany (1923), where prices rose 2,500% in one month.

In the United States, annual price increases of less than about 2% or 3% are not considered indicative of serious inflation. During the early 1970s, however, prices rose by considerably higher percentages, leading President Nixon to implement wage-and-price controls in 1971. Stagflation–the combination of high unemployment and economic stagnation with inflation–became common in the industrialized countries during the 1970s. The costs of the Vietnam War and the social programs of the Johnson administration, plus the oil prices increases in 1974 by the Organization of Petroleum Exporting Countries (OPEC), contributed to U.S. inflation. By the end of the 1970s the Federal Reserve raised interest rates in an attempt to reduce inflation. Following a recession in the early 1980s, there was renewed growth, somewhat lower interest rates, and a decrease in the inflation rate.

During the early 1990s, a downward business turn created an international recession—without significant deflation—that replaced inflation as a major problem; the Federal Reserve lowered interest rates to stimulate economic growth. The mid-1990s saw moderate inflation (2.5%–3.1% annually), even with an increase in interest rates. By the late 1990s, U.S. inflation was low (1.9% by 1998), despite record growth; it has tended to be somewhat higher (roughly 2%–3.5%) in subsequent years, due largely to increases in energy costs and, to a lesser degree, to large government deficits since 2001.

Bibliography

See J. Ahmad, Floating Exchange Rates and World Inflation (1984); A. J. Brown, World Inflation Since 1950 (1985); T. S. Sargent, The Conquest of American Inflation (1999).

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inflation

In cosmology, a hypothesized period of exponential expansion of the universe, shortly after the big bang, which may account for some of the universe's observed properties, such as the distribution of energy and matter. Grand unified theories of the forces of nature suggest that inflation could have occurred during the first 10⁻³² second after the universe began, when the strong force was decoupling from the weak and electromagnetic forces. During this time, the universe would have expanded by more than 100 orders of magnitude. Interpreted in the context of general relativity, inflation occurred while the universe existed in a state of nonzero energy density (false vacuum).

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inflation

In economics, increases in the level of prices. Inflation is generally thought of as an inordinate rise in the general level of prices. Four theories are commonly used to explain inflation. The first and oldest, the quantity theory, promoted in the 18th century by David Hume, assumes that prices will rise as the supply of money increases. Milton Friedman refined the quantity theory in the mid-20th century, arguing that the prescription for stable prices is to increase the money supply at a rate equal to that at which the economy is expanding. A second approach is John Maynard Keynes's theory of income determination, which assumes that inflation occurs when the demand for goods and services is greater than the supply. It calls for the government to control inflation by adjusting levels of spending and taxation and by raising or lowering interest rates. A third approach is the cost-push theory. It traces inflation to a phenomenon known as the price-wage spiral, in which workers' demands for wage increases lead employers to increase prices to reflect their higher costs, thereby sowing the seeds of a further round of wage demands. A fourth approach is the structural theory, which emphasizes structural maladjustments in the economy, as when in developing countries imports tend to increase faster than exports, pushing down the international value of the developing country's currency and causing prices to rise internally. See also deflation, price index.

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inflation

1. Economics a progressive increase in the general level of prices brought about by an expansion in demand or the money supply (demand-pull inflation) or by autonomous increases in costs (cost-push inflation)

2. Informal the rate of increase of prices