Inflation, Unemployment & Economic Growth

Inflation

Inflation is a sustained rise in the general price level (a fall in the value of money). Deflation is a sustained fall; disinflation is a fall in the rate of inflation. It is measured by a consumer price index (CPI) — a weighted basket of goods, where weights reflect spending patterns.

Causes:

Demand-pull — AD rises faster than AS (excess demand near full capacity) "too much money chasing too few goods."
Cost-push — rising costs (wages, imported raw materials, a weaker exchange rate, higher taxes) shift SRAS left.

Costs of inflation: loss of real value of savings and fixed incomes, "menu" and "shoe-leather" costs, uncertainty deterring investment, loss of international competitiveness, and arbitrary redistribution (borrowers gain, lenders/savers lose). Anticipated inflation is less damaging than unanticipated inflation.