inflation

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Inflation Predictions

Predicting inflation is a very important task for Economists. Future forecasts of inflation are used to determine current monetary policy. If inflation predictions are wrong it can cause inappropriate monetary policy, resulting in either inflation or recession. Although economists may look at various economic data, there is no foolproof method for predicting inflation. Generally speaking inflation is easier to predict and less volatile when inflation rates are low. As inflation increases it also becomes more volatile and harder to predict. Predicting Inflation To predict inflation, economists will need to look at…

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Sticky Inflation

Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth.   Sticky inflation is often associated with cost push factors, i.e. factors which cause a rise in inflation rate, but also lead to lower spending and economic growth. Sticky inflation is also sometimes known as Stagflation – Rising prices, but stagnating economy. The UK experienced stagflation back in the 1970s as a result of cost push inflation(higher oil prices and rising wages) In 2008, we experienced a rise in inflation, but…

Problem of Cost Push Inflation and Unemployment

Problem of Cost Push Inflation and Unemployment

Readers Question: how to resolve unemployment associated with inflation? Often, there is a trade off between unemployment and inflation. In an economic downturn unemployment rises, but inflation falls. This type of unemployment is known as cyclical unemployment. The unemployment associated with inflation would be a result of cost push inflation factors. In the diagram below we see inflation and a fall in GDP. Therefore, this leads to rising unemployment and rising inflation. This is an experience known as stagflation. Diagram Showing Inflation and Unemployment