INFLATION (Encyclopedia)

The term inflation generally identifies an increase in the prices of goods for consumption in a predefined period of time. Inflation usually leads to an erosion of purchasing power of the legal currency of the country in which the phenomenon occurs1. Inflation is usually identified in economics with the Greek letter as follows: , where p (t) is the general price level and is its first derivative with respect to time. The derivative can be positive (inflation), negative (deflation), or null (stable prices). The increase in the general price level in percentage terms gives the rate of inflation. The basis on which to calculate the rate of inflation is the definition of a basket of goods representative of the general expenditure made by a given community, as adjusted over time according to changes in consumption of goods or their quantity. 
Among the causes that determine the phenomenon of inflation are the increasing supply of currency by the monetary authorities, the increased demand for goods and services compared to a stable supply (excess demand), the increase in prices of goods coming from abroad and the rising costs of inputs (labour and capital).
1. Monetary inflation: monetary inflation is generally regarded as an historical period such as war, in which governments are not able to finance the massive increases in public spending through the tax burden, but they manage to do so by using the tool of money (increase in money), thus generating a surplus of instruments of payment in relation to available goods. 
2. Demand-pull inflation: it occurs when the demand for goods and services exceeds the supply (resources in the economic system), when the global demand exceeds the capacity of a given country. The excess demand can be determined by an excess of one or more of the components of the demand: Consumption, Investment, Public Expenditure, and Exports. With an increase in one or more of the above components, in the event that the offer does not observe an increase of equal value, an increase in prices will be observed, thus generating positive inflation. Demand-pull inflation is determined by the demand in contexts where the positive trend in prices generated by the aggregated demand is not offset by deflationary policies as appropriate: for example, a reduction in money by the monetary authorities, a tax increase or a reduction in public expenditure.
3. Expected inflation: the rate of inflation of period t +1 that is being considered will be observed in period t. The study of inflation expected rates are of fundamental importance for the monetary authority, which will use this parameter for the purpose of monetary policy decisions to be made in the current period, and for the people who will use this economic parameter in the various alternative options of consumption / savings that they have to do in t = 0. The expected rate of inflation is usually expressed as follows:
4. Perceived inflation: the phenomenon that identifies the change in prices determined in a country, not measured according to calculations by a statistical institute but by the economic agents who live there. Typically2, there is a negligible difference between the price changes measured by the Institutes of Statistics and that paid by consumers. In particular, the debate on the profound differences between the inflation rate measured and perceived arose with great resonance as a consequence of the introduction of the Euro3 in some European countries. Specifically, it is important to stress that the measure of perceived inflation is only qualitative: information is on the trend of the perceptions, not on their size, and the data refer to the difference between the proportion of respondents who consider the price dynamics consistent or greater than the market inflation rate identified by the Institutes of Statistics. In the euro area before the introduction of the single currency (2002), the indicator of the perceptions in each country was aligned with the actual rate, while there was a gap after 2002. To date, there is no convincing explanation of why, from the adoption of the euro, the perceived and measured inflation began to spread. One explanation may be found, as the thought of L. Guiso4, in the renaming of all prices in the new currency, without the possibility for consumers to make a comparison of the prices of goods in the old currency. The learning process of euro prices starts from the prices of goods that are purchased more frequently (food, coffee, newspaper, transport tickets, etc.), then the euro price index gives consumers an idea of the general price level and its dynamics. The dynamics of prices of goods perceived by consumers are above those statistically observed after the introduction of the euro. This alone may explain why perceived and actual inflation following the introduction of the single currency are mismatched.
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1The purchasing power is the quantity of goods and services that can be bought by one unit of currency. 
2Introduction of the euro and the divergence between measured and perceived inflation. Topic of discussion in December 2004. Paolo Del Giovane and Roberto Sabbatini. 
3L'Euro e l'inflazione. Percezioni, fatti e analisi. Paolo Del Giovane, Roberto Sabatini, F. Lippi. Il Mulino 2005. 
4Inflazione percepita e rilevata. L. Guiso 2003. La voce.
Bibliography
Del Giovane P., Sabbatini R. (2004). " Introduzione dell'euro e la divergenza tra inflazione rilevata e percepita". Tema di discussione-dicembre 2004. Banca d'Italia-Roma.
Del Giovane P., Sabbatini R., Lippi F. (2005). "L'Euro e l'inflazione. Percezioni, fatti e analisi". Il Mulino. 
Del Giovane P., Sabbatini R., Fabiani S. (2008). "What's behind inflation perceptions? A survey-based analysis of Italian customers". Tema di discussione-gennaio 2008. Banca d'Italia-Roma.
L. Guiso (2003). "Inflazione percepita e rilevata". La voce.
Editor: Alberto Maria SORRENTINO
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