The perception of INFLATION in Europe
Definition of Inflation
Inflation is the phenomenon that consists of continued and general growth on the price of goods and services in an economy in a certain period of time. It doesn’t follow a cyclical cause and does not affect either not an individual or a few. How can we measure the “inflation”?
To measure inflation, we use a "general index," a ratio, percentage expression. We call it Inflation rate which is the annualized percentage change in CPI (Consumer Price Index) over time.
What goods are involved in the formation of the overall index?
Logically this index covers the majority of the products consumed; that is, according to goods "characteristics", the typical "shopping basket", before statistical study of consumer behavior.
So, within a year the basket costs us 1000 and the following year 1200, we observed that, in general, in percentage terms, the price index has risen by a twenty percent, or 200 units. Following the same reasoning, we can find inflation, the rise in the price of the "basket" each year.
What is officially measured?
In reality there is a "core inflation" in which there are some basic given goods, managed services (gas, electricity and domestic gas) and concerted services (local and foreign transport, telephony, fees and licenses and others), and agriculture products (fruits and vegetables and other products).
Normally we see in a monthly series that core inflation tends to behave smoother, with fewer ups and downs than overall inflation. On the other hand, it is not surprising that at certain times the core inflation might be higher or lower than the overall.
CAUSES OF INFLATION AND THEORICAL BASES
Traditionally have distinguished four main reasons that justify the birth of inflation, which can be observed here (very simple way): Due to the demand: there are two theories, Keynesian and the monetarist. · Keynesian: Aggregate demand makes the production request and, if it is not satisfied, prices rise. · Monetarist: inflation emerges because of the amount of money increases, which causes that also increase the prices. As a result of costs: To maximize profits, the entrepreneurs and business owners always tend to raise the prices of their products to a certain level, to a higher percentage than their costs to rise. Due to the wage-price tension: The employer and workers establish a continuous struggle to get income enough. The workers demand more wages which grow in proportion to prices, or vice versa. It's a constant struggle between the workers purchasing power and profitability and productivity of employers. Due to structural rigidities: we know that both wages and prices are sticky downward; we also know that not all economic sectors grow together, and even happen that some sectors grow while others shrink. Because of that there is a new unevenness in prices, because the trend in the expanding sectors will rise in wages and prices, contrary to what will happen in other sectors, where wages and prices do not rise, but neither decrease. So if some rise and others fall, the price of our basket will rise inevitably.
INFLATION IN THE EUROPEAN UNION
How it is measured on UE and EEA (Euro area)? Which is the procedure?
Euro area inflation is measured by the MUICP (’Monetary Union Index of Consumer Prices’ as defined in Council Regulation (EC) No 2494/95 of 23 October 1995) which is the official euro area aggregate. New Member States are integrated into the MUICP using a chain index formula.
EU inflation is measured by the EICP (’European Index of Consumer Prices’ as defined in Council Regulation (EC) No 2494/95 of 23 October 1995) which is the official EU aggregate. The EU included 27 Member States from January 2007. New Member States are integrated into the EICP using a chain index formula.
Please join StudyMode to read the full document