Inflation

Inflation is a rise in the general level of prices. The most commonly reported measure of inflation is the annual percentage change in the consumer price index (CPI). The consumer price index tracks changes in the prices of a group of goods and services that most consumers buy. Prices are increasing when the CPI is positive and decreasing when it is negative. One major cause of inflation is the relationship between wages and productivity. Productivity is the output per worker hour. When wages increase faster than productivity, the result is inflation. The amount we can consume of any product depends upon the amount we produce. When wages go up but output does not, we have more money income but not more purchasing power. This occurs because the total supply of goods available for purchase has not increased as rapidly as the amount of money in circulation. The combination of rising wages and constant or sagging output exerts an upward push on prices.

Wage increases in one industry often put pressure on other industries to increase wages. Another cause of inflation is the expectation that inflation will continue in the future. Labor unions demand wage increases in anticipation of expected increases in the cost of living. Manufacturers raise the prices of their products in anticipation of future labor and raw material; cost increases. Consumers borrow money to finance today’s purchases in the belief that prices will be higher tomorrow. Some economists argue that inflation subsides only when people believe that it will subside.

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