Understand Inflation and Indicator to trade currency

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inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures; in particular the MZM ("Money Zero Maturity") supply velocity. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

 

The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index.The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time. The Retail Prices Index is also a measure of inflation that is commonly used in the United Kingdom. It is broader than the CPI and contains a larger basket of goods and services.

 

Other widely used price indices for calculating price inflation include the following:

 

Producer price indices (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.

Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.

Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy.

 

 

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THE PHILLIPS CURVE

The Phillips Curve is a graph that illustrates the observed relationship

between the inflation rate and the unemployment rate. It is a downward

sloping curve, indicating that a trade-off exists between inflation and

unemployment.

This has important implications for government policies that attempt to

achieve economic stability. Expansionary policies may reduce

unemployment at the expense of higher inflation. Contractionary policies

may reduce inflation at the cost of higher unemployment. Activist

government policies, then, require that the costs and benefits associated

with such policies be considered.

Policies tend to adjust as economic realities change the perceived costs

and benefits over time.

 

Why does the relationship between inflation and unemployment exist?

Economists have come up with a few possible reasons:

Leverage on wages

Production bottlenecks

Normal shifts in aggregate demand and aggregate supply

Leverage on Wages

Changes in the price level are closely related to changes in wage rates. In fact, the original Phillips

Curve was developed to show the observed relationship between wage inflation, not price inflation, and

unemployment. Economists at a later time changed it to show price inflation in part because of the close

relationship between wage inflation and price inflation. Wages contribute a large share of the costs of

production.

During times of economic expansion, profits are high and few replacement workers are available.

Workers are in a good position to bargain for higher wages. Businesses would stand to lose a lot of

profits if a labor strike occurred. With aggregate demand high, businesses can more easily pass along

the increase in labor costs to their customers in the form of higher prices. The result of this situation:

Low unemployment resulting in upward pressure on wages and prices. Unemployment decreases while

inflation increases.

However, when unemployment is high, businesses have more leverage than workers. Workers can be

more easily replaced because of the large pool of unemployed workers. Sales and profits are low so the

opportunity costs of a strike will be relatively low. Workers know the possibility of unemployment is very

real, and the priority of keeping a job increases relative to the priority of wage increases. The result of

this situation: High unemployment resulting in little upward pressure on wages and prices.

Unemployment increases while inflation decreases.

[ngocanhno110265]

inflation and interest rate are razor sharpend on both side - (if fact you should call it all sides - as it has many side ways movement)

 

When interest rate rise money flow will be towards secured debt market and liquidity is contained - funds availabilty in the maket will be rationalised - it does not guarantee lower inflation - in fact it will have higher inflation because of cash flow management - Bank lending rate will be higher and it will have cascading effect of higher production cost - higher inflation. short term capital inflow will further confuse the strong economy.

 

if int rate is low (int. cut) debt market will sink and there will be more liquidity and this fuel inflation and outflow of capital to other countries where interest rate is higher or to sound economy (out of country) will this reduce the currency valuation. this will also fuel inflation.

 

only best judgement in stabiliting economy will give good result - but it takes 1 to 2 years for correction