The Effect Of Inflation On The Price Of Inflation

1173 Words Sep 18th, 2014 5 Pages
Inflation is generally, defined as sustained or continuous increase in the general price level in an economy. Inflation has been described and categorised in terms of the rate at which the general price level is increasing , market mechanism , expectations and causes. In explaining the causes of inflation one common cause always surfaces for consideration and that is that inflation occurs when aggregate demand is growing at unsustainable rate leading to increased pressure on scarce resources. Or Inflation can be caused when aggregate demand exceeds aggregate supply. This is commonly referred to “demand-pull” factors. Other factors mentioned in economic theory are the “cost push” factors, inflation expectations.
The consumer price index
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In addition, low and stable inflation is good as it helps the growth of employment and protects the incomes of savers and the poor. Although, monetary policy can achieve price stability in the short to medium term through its transmission channels that affect inflation. Success of monetary policy is largely dependent on its ability to avoid extreme variation in demand, overall expenditure and operate in a counter-cyclical way when required. This calls for an accurate measurement of forward looking macroeconomic indicators such as inflation and its impact of monetary policy on the economy.
In addition, as many central banks adopt inflation targeting framework, Inflation forecasting has taken centre stage in economic policy-formulation. At the heart of an inflation targeting monetary policy framework is the need to produce forward looking macroeconomic indicators. Unlike the developed economies, inflation forecasting in emerging and developing economies is challenging due to the volatility in food prices, the exchange rate and the structural changes in these economies Aron and Muellbauern (2012). As forecasting inflation is difficult
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