Set 4 - Inflation

Inflation General rise in overall price level.

Price level Overall level of prices (measured by an index like CPI).

Purchasing power What money can buy.

Relative price change Price change of a specific good (not necessarily inflation).

CPI (Consumer Price Index) Tracks prices of a representative consumer basket.

Base year Year the price index is normalized to 100.

Deflation General decrease in overall price level.

Substitution bias CPI overstates cost of living because basket is fixed.

Core inflation Inflation measure designed to capture underlying trend (often excludes volatile items).

Stagflation Occurs when there is a recession and inflation.

CPI-median BoC-preferred “median” measure (50th percentile of CPI price changes).

PPI (Producer Price Index) Prices of inputs to production.

GDP deflator Price index for domestically produced goods/services.

Nominal variable Measured in dollars of the time.

Real variable Inflation-adjusted into base-year dollars.

Nominal interest rate Stated interest rate.

Real interest rate Inflation-adjusted interest rate.

Money illusion Focusing on nominal dollars instead of real values.

Menu costs Costs to firms of changing prices.

Shoe-leather costs Costs of avoiding holding cash under inflation.

Hyperinflation Extremely high inflation.

Unexpected inflation Inflation − expected inflation.

Inflation expectations Beliefs about future inflation.

Adaptive/anchored/rational/sticky expectations Different ways expectations form.

Demand-pull inflation Inflation from excess demand.

Cost-push inflation Inflation from rising production costs / supply shocks.

Supply shock Cost change that shifts inflation at a given output gap.

Wage-price spiral Wages and prices reinforcing each other upward.

Phillips curve Relationship between slack (output gap or unemployment) and unexpected inflation.

Exchange rate pass-through Exchange rate changes affecting domestic prices.