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Thread: How the Government measures inflation?

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    Post How the Government measures inflation?

    How the Government measures inflation?
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    What is Inflation

    Inflation is an economic condition in which prices generally experience a prolonged or temporary increase in prices. Inflation is an economic phenomenon that can never be eliminated. The efforts made are usually limited to reducing and controlling it. Inflation can occur because the money supply is more than needed. Inflation can be classified into four groups, namely:

    • Low inflation - This inflation occurs when the price increase is below the 10% annual rate.

    • Moderate inflation - This inflation occurs when prices increase between 10% -30% a year.

    • Heavy inflation - This inflation occurs when prices increase between 30% -100% a year.

    • Hyperinflation or uncontrolled inflation - This inflation occurs when the price increase is above 100% a year.



    Inflation Impact

    Inflation has both positive and negative impacts on a country. So, whatever the impact of inflation

    Positive impact

    The effect of inflation on investment and assets does not always have a negative impact, there are also positive ones. The positive effect of inflation can be felt by entrepreneurs and debtors.

    • Debtor - The debtor will get a profit because, with inflation, the money he returns will have a lower value than when he borrowed.

    • Entrepreneurs - Entrepreneurs who have an income that is higher than the increase in their production costs. If the price of goods rises (during inflation), especially companies engaged in staple goods that people will still buy even though the price increases.


    Negative impact

    Although there are positive impacts for certain parties, the effect of inflation on investment has quite some negative impacts. Even inflation can make a country's economy unstable and some even decline completely.

    • Creditors - The negative impact will be felt for creditors because with inflation, the value of money they receive will be smaller than when they lent (before inflation).

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    • Non-liquid or liquid assets - These liquid assets have a more vulnerable impact than non-liquid assets. If there is a high increase in inflation, the liquid assets owned by businesses or individuals will decrease. This also applies to investments in the form of mutual funds, stocks, and bonds.

    • Unreliable economic stability - This is because when there is inflation, there will be the possibility that inflation will continue, which means, prices will continue to rise. Therefore, consumers decide to make large purchases before prices rise, which causes demand to increase.



    How to Deal with Inflation

    The first thing to do is to know the causes of inflation so that the way to overcome it can be identified. Inflation is not only related to the amount of money in circulation, but also the number of goods and services available in society. Therefore, solving the inflation problem requires the right policies. There are usually two policies that can be taken to overcome the problem of inflation, namely monetary policy, fiscal policy, and other policies


    Monetary policy

    Monetary policy is any form of policy taken by the government in the monetary (financial) sector to maintain monetary stability to improve public welfare. The monetary policy includes:

    • Determination of Cash Inventory Policy - The central bank can adopt a policy of reducing the money supply by fixing the money supply and fixing the cash supply with banks. By reducing the money supply, inflation can be reduced.

    • Discount Policy - The central bank can apply a discount policy by increasing the interest rate. The goal is to encourage people to save. Thus, it is hoped that the amount of money in circulation can be reduced so that the inflation rate can be reduced.


    Fiscal policy

    Fiscal policy is a measure to influence government revenues and spending. This policy can affect the inflation rate. Fiscal policy includes the following:

    • Saving on Government Expenditure - The government can reduce inflation by reducing spending, so that the demand for goods and services decreases which in turn can reduce prices.

    • Raise Tax Rates - The government can raise tax rates. Increasing the tax rate for households and firms will reduce the level of consumption. Reducing the level of consumption can reduce the demand for goods and services so that prices can fall.


    Note
    Inflation in a country cannot be avoided and will continue to occur because it requires monetary and fiscal policies to deal with inflation problems.
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    INFLATION

    Inflation is an economic condition that is characterized by increase in the price level for goods and services. To a lay mam, inflation is the period within an economy where goods and services ridiculously gets expensive then what it used to be. Inflation is usually gradual, in that changes in the cost of goods increases over time and in some other cases, inflation can come through as the introduction of a sudden event.


    The event of inflation within an economy makes a currency lose it buying power as it reduces in value over time. Due to this, it would cost more money to pay for the same value of goods and services as before. Inflation is a concept that every economy strives to avoid as much as they can, even though a level of inflation must be maintained within an economy. It exists much like a neccesary evil, it cannot be absolutely avoided the same way it cannot be entirely embraced.


    Inflation is the direct opposite of deflation which reflects a decline in the general price level of goods and services within an economy. Inflation can however be introduced as a measure through which deflation can be actively controlled.


    HOW GOVERNMENT MEASURE INFLATION

    Inflation has always remained an economic event that every government of the world pays attention to. The reason for this is because of the impact that this type of economic event has on the economy. Usually depending on what the present economic condition of a nation says, inflation could either be a negative or positive event. Most of the times, when inflation is being pushed into an economy, it is for corrective case and it times like this it could be considered as a positive economic event. Whether inflation is for corrective purpose or not, there is a particular level or percentage of inflation which should be maintained by any nation in other to have a balanced economy. To maintain a balanced economy, inflation rate should measure around 2% or a little less than that. This is the normal standards expected of inflation to exist within an economy, not having any inflation at all is not in anyway encouraged and inflation that rise well over 2% can be harmful to the economy as well. To this note, the concept of inflation has clearly presented itself as one which is absolutely important and cannot be parted with.

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    It is the duty of the government to monitor the rate of inflation which exists within it economy, this is in other to monitor it economic performance as well as maintain a proper economic growth. Inflation in itself is an economic indicator which shows the state of any known economy. However, to measure inflation, government would also have to take advantage of the use of other economic indicators. 


    The most common economic indicator used to measure the level of inflation recorded over time within an economy is the consumer price index (CPI). Consumer price index is an economic indicator used in measuring the weighted average of prices of goods and services purchasef by consumers. The indicator basically takes note of changes in the prices of goods and services, compile them into a common basket of goods and then makes an average of them. The CPI also provides the opportunity to measure the consumer buying power over a period of time. Since inflation is all about changes in price levels towards the upward direction, the CPI comes in very handy as an economic data that could be used to determine the level of inflation.


    To arrive at the value of inflation, the consumer price index is used to group goods and services into relevant basket of goods and will then take account of their weighted average depending on the importance placed on these goods by consumer. The consumer price index in itself does not stress changes that occur directly with price but it is only a reflection of how much in percentage price has moved from the previous data. To this effect, having a consumer price index of a basket of good more than another does not neccesarily mean that one is more expensive than the other, it is only an indication that prices moved higher in percentage in one basket of goods than the other.


    Since the rate of inflation is measured in percentage, taking account of different basket of goods the formula to make use of would be the current price level - the previous price level / the previous price level × 100. This calculation will result in the percentage of inflation recorded for every goods and services within the economy.


    The government is expected to always stabilize inflation within the economy by introducing different regulated policies. This way, it can maintain quality economic standards capable of making growth available within that economy.

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    What is Inflation
    Inflation can be described as the persistent increase in the price of goods and services over a period of time, where money lose it's purchasing power. Inflation is one of the economic factors that have both negative effect or positively effect on the economic growth and development of a particular economy.

    Types of Inflation
    These are the types of Inflation in an economy.
    1. Demand Pull inflation: Demand Pull inflation is a type of inflation that is caused by the situation where the aggregate demand for goods and services exceeds the supply for the goods and services. This is the major cause of inflation in an economy. When the demand for goods and services is increasing, the manufacturers try to prevent this situation by producing more of the product, but if the demand for the goods and services persist to increase, the manufacturers won't be able to meet the demand for the goods and services which will lead to the process where the manufacturers will increase the price of the goods and services.
    2. Cost-Push inflation: This is a type of inflation that occurs when the price of cost of production increases i.e the manufacturers spend more on the input for the production of goods and services that will be sold to the public. Such as increase in the price of raw material, increase in the salaries of labour, or increase price of petrol or diesel.

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    3. Built-in inflation: Built-in inflation is a type of inflation that is cause by the situation where past event is affecting the current economic situation of a particular country. This type of inflation is also regarded as hangover inflation.

    How do Government Measure inflation
    There are several ways government measure inflation in an economy. The first way is by using Consumer Price Index (CPI).
    1. Consumer Price Index: The Consumer Price Index is one of the common and major way to measure inflation in an economy. Consumer Price Index is regarded as a measure of average change in the price paid for goods and services by consumers of market basket of goods and services over a period of time. Consumer Price Index is used by both government and economist in order to measure the rate of inflation in the economy. In order to have a good economy that is free from inflation, the inflation rate in the economy must not be more than 2%.
    2. Monetary Policy: Monetary Policy is a measure taken by government or central bank in order to regulated the economic growth of a particular country. Monetary policy can also be used by the government in order to deal with inflation in the economy. Monetary policy increase the interest rate of loan to commercial banks, which also make commercial banks increase the interest charged on loans that are requested by individuals or firms. This will discourage the public to request for loan.

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    What Is Inflation? How do you measure inflation

    Measurable organizations start by gathering the costs of an extremely enormous number of merchandise and ventures. On account of family units, they make a "container" of products and enterprises that mirrors the things devoured by families. The container doesn't contain each great or administration, however the bin is intended to be a decent portrayal of both the sorts of things and the amounts of things family units normally burn-through.

    Organizations utilize the container to build a value list. To begin with, they decide the current estimation of the bin by figuring how much the crate would cost at the present costs (duplicating every thing's amount by its value today and summarizing). Then, they decide the estimation of the crate by ascertaining how much the bushel would cost in a base period (duplicating every thing's amount by its base period cost). The value list is then determined as the proportion of the estimation of the bushel at the present costs to the incentive at the base time frame costs. There is a same yet some of the time more helpful plan to develop a value record that relegates relative loads to the costs of things in the container. On account of a value record for buyers, factual organizations get the overall loads from buyers' use designs utilizing data from customer overviews and business reviews. We give more subtleties on how a value list is built and talk about the two essential proportions of buyer costs—the shopper value file (CPI) and the individual utilization consumptions (PCE) value list—in the Consumer Price Data area.

    A value record doesn't give a proportion of expansion—it gives a proportion of the overall value level contrasted and a base year. Expansion alludes to the development (rate change) of a value record. To compute the pace of swelling, the measurable offices analyze the estimation of the file throughout some period so as to the estimation of the list at some other point, for example, month to month, which gives a month to month pace of expansion; quarter to quarter, which gives a quarterly rate; or year to year, which gives a yearly rate.

    What is underlying inflation


    Some cost files are intended to give an overall outline of the value improvements in a wide portion of the economy or at various phases of the creation cycle. Due to their extensive inclusion, these total (additionally called "all out," "in general," or "feature") cost lists are of impressive interest to policymakers, family units, and firms. Be that as it may, these measures without help from anyone else don't generally give the most clear image of what the "more supported upward development in the general degree of costs," or fundamental expansion, turns out to be. This is on the grounds that total measures can reflect occasions that are applying just a brief impact on costs. For instance, if a storm obliterates the Florida orange harvest, orange costs will be higher for quite a while. However, that more exorbitant cost will create just a transitory expansion in a total value record and estimated swelling. Such restricted or transitory impacts are now and again alluded to as "clamor" in the value information since they can cloud the value changes that are relied upon to endure over medium-run skylines of quite a while—the fundamental swelling rate.

    Fundamental swelling is another method of alluding to the expansion part that would win if the temporary impacts or clamor could be eliminated from the value information. From the point of view of a financial policymaker, it is straightforward the significance of recognizing transitory and more relentless (longer-enduring) developments in swelling. In the event that a financial policymaker saw an ascent in swelling as transitory, at that point she may conclude there is no compelling reason to change loan fees, yet on the off chance that she saw an ascent in expansion as constant, at that point her proposal may be to bring loan costs up in request to slow the pace of expansion. Purchasers and organizations can likewise profit by separating among impermanent and more industrious developments in swelling. Thus, various elective measures have been created to quantify fundamental expansion.
    How is underlying inflation measured

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    One well known way to deal with eliminating clamor in value information has been to bar segments that are seen as the wellspring of commotion in total value records, for example, the CPI or PCE value file. A portion of these proportions of basic swelling expect the commotion is identified with the size of value changes (littlest and biggest), while others partner the clamor with specific things (with the most widely recognized model being food and energy). The middle CPI is an illustration of the previous in that all value changes are barred from the record aside from the one in the center, while center CPI and center PCE are instances of the last mentioned, in that both avoid food and energy costs. The Consumer Price Data area discusses fundamental expansion measures in more detail.
    What is the connection between the Phillips curve and inflation

    The Phillips bend assists with clarifying the connection among expansion and the condition of the economy. All in all, the Phillips bend recommends that swelling is moderately high when the economy is solid and the joblessness rate is low, and expansion is generally low when the economy is powerless and the joblessness rate is high. Nonetheless, financial conditions are just one of the variables that decide expansion. A portion of different drivers of expansion remember changes for energy costs, vacillations in return rates, the efficiency of the labor force, and individuals' assumptions over where swelling is going later on, among others. Consequently, swelling may not generally be firmly associated with financial conditions and the high points and low points of the business cycle

    What is hyperinflation

    At the point when expansion is amazingly high and regularly quickening (costs are rising quickly and by and large at an expanding pace), an economy encounters excessive inflation, which is generally connected with or can cause social change and common agitation. The most popular illustration of out of control inflation happened in Germany between World War I and World War II. Later models incorporate Venezuela beginning in 2017, Zimbabwe during the 2000s, and Yugoslavia during the 1990s. One normal meaning of out of control inflation is when expansion is in excess of 50% every month. In some outrageous cases, excessive inflation can be extreme to the point that costs twofold inside merely days

    What is deflation?

    While swelling forces costs on a general public, the contrary situation, flattening—when the general value level falls for a supported timeframe—can be expensive, as well. Flattening can change individuals' conduct in manners that hurt the economy. On the off chance that individuals figure costs will go down later on, they have less impetus to spend their pay now. At the point when costs fall, and individuals purchase less, organizations may have to bring down their representatives' wages or even lay off laborers. These activities could then put into action a "deflationary twisting" in which hesitance to spend prompts lower financial action and a quicker decrease in costs, with the cycle at that point rehashing itself

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