Inflation

General

 * Headline inflation: raw inflation figure as reported through CPI that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes the current year's prices according to the base year's values
 * Core inflation: Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month, which can cause unwanted distortion to the headline figure (food, energy)
 * An increase in prices is a necessary but not sufficient precursor for inflation. An inflationary process requires continuously rising prices, so the price level must be increasing over a number of time periods to constitute inflation
 * Inflation (opposite deflation) means an increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index
 * Disinflation (opposite reflation) is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level
 * Productivity gains are disinflationary if they are not matched in real wages
 * Inflation targeting is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability. The central bank uses interest rates, its main short-term monetary instrument
 * However, the unemployment rate generally only affects inflation in the short-term but not the long-term. In the long term, the velocity of money is far more predictive of inflation than low unemployment
 * Inflation is always relative to something, usually relative to the employment rate. Thus, my political preferences determine the weight I attach to unemployment vis-a-vis inflation. Left politicians will attach a higher loss-weight to unemployment than to inflation in the social welfare function
 * The crux with inflation is not inflation itself but expected inflation. Inflation hits whoever didn't price in the (expected) inflation (e.g. because collective agreements have been passed which lock in wages for 2 years)
 * The higher inflation, the higher the (empirically observable) volatility of inflation. And since interest-receivers try to avoid volatility, they also want to subdue inflation
 * Short-term surprise inflation works in practice (despite mainstream econ theory
 * The dispute between monetary and fiscal policy was based on a shared theoretical framework, the differences lying in the structure and sequence of adjustment involved in the conflicting models.
 * CPI is a benchmark against which to compare nominal wage increases to understand what these increases mean in terms of living/purchasing power
 * Goal is to explain changes in the general level of prices, not of particular prices
 * When after the 1930s trade unions gained in power, employers found it more costly to fight the distributional conflict through the labor market, instead trying to increase prices to offset the losses incurred at the negotiation table
 * Although some inflation is permissive of those ideal prospects, it is necessary to guard against the fallacy that inducing inflation might lead to greater economic growth Source

Theories of inflation

 * Good introduction
 * Since the 1950s we have seen three major fashions wax and wane: from the 50s to the mid 70s the focus was on labor markets and relative bargaining power with little reference to aggregate demand; from the late 70s to the 90s it was mainly on money and monetary aggregates; and from the 90s onwards it has been on the NAIRU and the determinants of expectations (e.g. NK Philippa curve)
 * Monetary theories: theories focusing on money supply (the expansion of which is assumed to be determined by CB); theories focusing on money velocity (through financial sector innovation); theories focusing on expansion of demand for money (demand pull)
 * Non-monetary theories: cost-push theories (e.g. change in propensity to consume; increase in investment, government expenditure or wages); demand shift; monopoly mark-up pricing
 * The distributional effects of inflation depend on the speed and frequency with which wages and prices are adjusted

New political economy/Keynesian

 * Inflation is determined only by the actions of monetary policy actors (i.e. central banks)
 * Focus on reputation of CB; its ability and credibility of target announcements

Monetarism

 * Natural rate of unemployment = that unemployment rate which is commensurable with price stability
 * QTM: Money supply = claims on current output vs. Keynes where money is also the claims on future income streams

Marxist

 * What counts today in asset manager capitalism is to own assets that appreciate in value faster than inflation and wages

Keynesian

 * Within the Keynesian framework, with the introduction of a modified demand for money function in which expectations play a role, is that inflation can only occur for the expansion of aggregate demand (for example, but not necessarily, through an expansion of the money supply) above full employment levels.
 * The Keynesian dispute with monetarism then does not concern the explanation of inflation per se, but only the structural, sequential and quantitative role played by the individual parts → Keynesians in general anticipate that quantities are more responsive than prices to exogenous and endogenous changes; more emphasis is laid upon deficiencies in output rather than excesses in demand as the source of accelerating unemployment and inflation.

Empirical observations

 * The link between domestic measures of slack and inflation has proved rather weak and elusive for a couple of decades: e.g. the coefficient of the link between labour market tightness and inflation had become insignificant - inflation doesn't respond to UE. This insignificance is even starker if you use output rather than labor. Just as for inflation (i.e. prices), wages respond surprisingly weak to economic conditions.
 * The standard explanation: inflation expectations have been well-anchored so that wages and prices become less responsive to slack
 * Alternative explanation: Globalization of product, capital and labor markets has played a significant role - shrinking AE's share of global labor market from 41% (1990) to 18% (2015) → globalization eroded the pricing power of both labor and firms