Readers Question: What is meant by the term inflationary noise?
Definition of Inflationary noise. When inflation distorts price signals.
If inflation is 0%, and Peugeot cars increase in price then this is a signal Peugeot are more expensive. However, if inflation is 5 or 6%, it is harder to work out whether the increased price of Peugeot cars is due to inflation or an increase in the relative price.
Shoe leather costs are associated with high inflation. It refers to the cost of working out which price increases are due to inflation and which are relative changes in prices. With prices changing rapidly, it might also encourage people to spend more time checking prices and travelling around.
Inflationary noise is more of a problem when inflation is unexpected. e.g. if inflation is always 2% and this is what people expect, it is easier to work out relative prices. However, if inflation is unexpectedly high, it becomes more difficult to work out relative price changes.
Deflation would also make it difficult to work out relative prices.