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Consumer price inflation

Consumer price inflation is an increase in the general level of prices for goods and services that are purchased by the population of a country.

In terms of growth rates, consumer price inflation is divided into three main types:

1. Moderate (creeping) inflation. With this type of inflation, the growth of the general price level usually does not exceed 10% per year. This type of inflation is considered normal for a modern economy since it is regulated, does not significantly affect the level of well-being of the population, and does not reduce the purchasing power of the consumer. Moderate inflation occurs due to the renewal of the assortment of goods and services, and it contributes to an increase in demand and the development of production. Examples of countries with moderate inflation (as of the end of June 2021) include the United States, Germany, the United Kingdom, Denmark, France, Russia, Hungary, Estonia, Egypt, and Poland.

2. Galloping inflation. The growth of the price level, in this case, varies from 10% to 50% per year. Unlike the previous type, this type of inflation is more difficult to manage and is characterized by a more rapid rate of decline in the national currency rate. The population, in this case, begins to rapidly save and invest in various goods. Galloping inflation is mainly observed in developing countries, for example, in Iran, Nigeria, Turkey, Zambia, Angola, and Ethiopia (as of June 2021).

3. Hyperinflation. With this, price increases exceed 50% per year. Such inflation is considered uncontrollable and is characterized by a drop in the level of production in the country, the closure of enterprises, a decrease in sales volumes, an increase in unemployment, and a general decline in the welfare of the population. Hyperinflation as of June 2021 was observed in Venezuela, Sudan, Zimbabwe, and Lebanon.

The graph below shows the dynamics of the inflation rate in annual terms in various countries of the world.

To assess the change over time in the general level of prices for goods and services consumed by the population, an indicator such as the consumer price index (CPI) is used. This measures the ratio of the cost of a fixed list of products in prices of the current period to its cost in prices of the previous or reference period, which equals 100. For example, when calculating the CPI in Germany, 2015 was taken as the base period, in the USA - 1982-1984, in Russia - 2000. The CPI is used to estimate inflation in a country, as well as when adjusting wages, social benefits, and tax levels. In Russia, this index is used by the Ministry of Finance of the Russian Federation for calculating the par value and ACI for government bonds OFZ-IN.

In the countries of the European Union (for example, Finland, Sweden, Belgium, Croatia, and Greece), an indicator such as the harmonized index of consumer prices (HICP) is used. It is calculated using a single methodology for the same set of goods and services, and it allows you to compare consumer inflation in different countries in the current month relative to the same month in the previous or base year. The HICP is also published in countries that are candidates for accession to the EU, for example, Albania, Turkey, and Montenegro.

The similarity between the CPI and the HICP lies in the fact that both indicators allow assessing the change in the average price level for a fixed list of goods and services. In addition, the CPI and the harmonized index are calculated using the same underlying price data collected from the same sources. The difference is that the CPI is an indicator of general price trends and the level of consumer inflation in a country, while the harmonized index serves as the main one for comparative measurement of inflation and assessment of currency stability in a certain group of countries (in this case, the European Union).

The graph below shows the dynamics of the CPI and HICP for the example of the Czech Republic and Denmark.

In addition to general inflation, core inflation is also analyzed, which reflects the dynamics of prices for consumer goods and services relative to the same period a year earlier (YoY), except for prices influenced by seasonal and administrative factors.

For example, in the United States, the calculation of core inflation excludes the cost of food and energy, as well as oil products and utilities, in Switzerland - fresh and seasonal products, as well as oil products, in Russia - fruits and vegetables, vodka, fuel (gasoline), transportation services, communications, and housing and communal services, in Poland - food, soft drinks, and fuel and energy, which are especially sensitive to internal and external shocks.
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