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# Measuring and causes of inflation

1. How is inflation measured?

2. What are the causes of inflation?

3.Are natural disasters causes of inflation or deflation? Where might the public see the evidence?

4.What are the costs of inflation?

5. Why is inflation so widely feared?

#### Solution Preview

Use has been made of materials at the following sites in framing the answers:

http://www.economicswebinstitute.org/concepts.htm
http://www.inflationdata.com/inflation/Inflation_Articles/Hurricane_Inflation.asp

1. How is inflation measured?
Inflation is a sustained rise in the general price level. When most prices grow, there is inflation, provided the other prices don't drop too heavily.
Inflation is measured by:
- The Consumer Price Index
- The Producer Price Index
- National Accounts Measures
- The GDP Implicit Price Deflator
- GDP Chain Price Index
The Consumer Price Index (CPI) is "A measure of the average price change of a representative basket of goods and services purchased by the typical metropolitan household"
Inflation is calculated from direct observation of price change. The prices of commodities go into calculating CPI. These goods and services are organized into groups. These are food, alcohol and tobacco, clothing and footwear, housing, household furnishing supplies and services, health, transportation, communication, recreation, education and miscellaneous.
The producer price index (PPI) measures the price change of intermediate goods, or of goods purchased by firms from other firms. The significance of the PPI is that the price change of intermediate goods will feed into costs of production of consumer goods and services, and so the PPI might act as a leading indicator of CPI movement.
National Accounts Measures (GDP Implicit Price Deflator, GDP Chain Price Index): These are both measures of the price change of all goods and services that enter into GDP. They are therefore, measures of the price change of final goods and services.

2. What are the causes of inflation?
Inflation is caused by a combination of four factors. Those factors are:
- The supply of money goes up.
- The supply of goods goes down.
- Demand for money goes down.
- Demand for goods goes up.
Inflation can be Cost-push inflation or demand pull inflation. The inflation resulting from an increase in aggregate demand is called demand-pull inflation. Such inflation may arise from any individual factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand are:
1. Increases in the money supply
2. Increases in government purchases
3. Increases in the price level in the rest of the world
Demand-Pull inflation is caused by excessive consumer demand for goods and ...

#### Solution Summary

The solution discusses how inflation is measured, the causes of inflation, whether natural disasters are causes of inflation or deflation and where might the public see the evidence, the costs of inflation and why inflation is so widely feared.

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