Theory

In the economy inflation relates to the rise in the level of prices of goods and services during a period of time. When the prices of good rises in a market economy each unit of currency would buy fewer good and services than before. The power of inflation creates a decrease in the purchasing power of money. The inflation can be measure by the inflation rate the change in the price index during a period of time. Inflation can perceived as a negative or positive effect for the economy. Positive would be the adjustment of banks interest rates and encouraging investment. Negative effects of inflation could be discouraging future investments, the increase of opportunity cost. Inflation may be caused be one of the following aspects of the economy: Money supply, this in caused when the Federal Reserve decides to put more money into circulation at a higher rate than the economic growth. National debt, the government will have to raise taxes or print more money to pay the debt.

Research In article called “Does inflation uncertainty increase with inflation?” by Golob, John states that inflation in followed by an uncertainty of the future of further increase of inflation that may render the decision of consumers and business. “One of the most important costs of inflation is the uncertainty it creates about future inflation. This uncertainty clouds the decision making of consumers and businesses and reduces economic well-being. Without this uncertainty, consumers and businesses could better plan for the future. According to many analysts, uncertainty about future inflation rises as inflation rises. As a result, these analysts argue that the Federal Reserve could reduce inflation uncertainty by reducing inflation” (Golob). Other analysts argue that high inflation or low inflation creates no uncertainty as long as the inflation remains stable. Another important article examines how commodities prices and inflation are linked. The inflation is strongly related to commodity prices such as crude-oil and analyst state that inflation can be predicted when the demand of such commodity is increased. The article by Furlong, Fred; Ingenito, Roberto says that “The strongest case for commodity prices as indicators of future inflation is that they are quick to respond to economy-wide shocks to demand. Commodity prices generally are set in highly competitive auction markets and consequently tend to be more flexible than prices overall. As a result, movements in commodity prices would be expected to lead and be positively related to changes in aggregate price inflation in response to aggregate demand shocks”( Furlong; Ingenito).

Real World Example A real world example was studied by Fortune magazine and written in an article called “What a new inflation measure would mean for your wallet “ which states how the government uses Consumer Price Index to measure the price index, which tracks a broad basket of consumer goods. When inflation hits and