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Glossary

Inflation

Inflation is an indicator of price dynamics that shows an erosion of purchasing power of a given currency over time. In other words, it is an indicator of how much more, as a percentage, you will need to pay for the same product at different times. 
 
When the currency value is lost, prices rise. Consequently, fewer goods and services are bought. This, in turn, affects the total cost of living of the population and leads to a slowdown in economic growth. 
 
There are several types of situations that lead to an increase in inflation:   
 
  • Demand inflation – occurs at the time of an increase in the supply of money and the availability of loans to the population, which stimulates the overall demand for goods and services in the economy. But at the same time, the production of goods does not keep up with demand. 
  • Cost inflation – appears as a result of rising prices for resources required for the production of goods and services. For example, a speculative increase in oil prices leads to an increase in the cost of fuel, rubber, plastic, etc. Thus, an increase in the price of one product leads to an increase in the price of other widely used goods.
  • Built-in inflation is connected with the expectations of the population that the current rate of inflation will persist in the future. Therefore, the population requires employers to index wages at the inflation rate or higher. The employer, who thereby increased their costs, compensates by increasing the cost of their products.
 
Price indices are used to determine changes in prices for individual goods and services over the accepted time periods:
 
  • Consumer Price Index (CPI) an index that measures the average level of price change for goods and services of basic needs of the population (transport, utilities, food, personal belongings, etc.)
  • Wholesale Price Index (WPI) is an index that allows you to monitor the dynamics of changes in the prices of goods sold and bought in bulk. The indicator of this index is a weighted average of three values: wholesale price of goods for export, wholesale price of goods for import, internal wholesale price for goods.
  • Producer Price Index (PPI) is an index that measures the average change in prices for sales of goods and services received by domestic producers. The index measures the change in prices from the point of view of sellers. It considers three areas of production: industry, commodity and processing.
 
Financial regulators are engaged in monitoring the situation with inflation, for example, in the Russian Federation – the Central Bank of the Russian Federation, in the United States – the Federal Reserve System, in United Kingdom– the Bank of England. Control is carried out by implementing measures through monetary policy, which determines the size and growth rate of the money supply. High and unstable inflation rates can entail serious costs for the economy, since the real value of assets, such as stocks, bonds, and currencies, will decrease.
 
To protect assets from acceleration of inflation, there are special protective tools. Such as US Treasury Inflation-Protectied Securities (TIPS) or the Russian equivalent of OFZ-IN bonds, the nominal value or coupon of which is adjusted for inflation.
 

 

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