Important Definitions Related to the Macroeconomic Policy Goal of Low Inflation

· Inflation is a general increase in the level of most prices in an economy.

· The price level represents the prices of most products in an economy. It is approximated by a price index, such as the Consumer Price Index (CPI), Producer Price Index (PPI), or the GDP deflator.

· The inflation rate is a measurement of how quickly prices are rising in an economy. It is typically reported as the annual percentage increase in the price level.

· Deflation is a general decrease in the price level.

· Disinflation occurs when the inflation rate decreases, but remains positive.

· Hyperinflation is extreme inflation in which the inflation rate exceeds 50% per month.

· Nominal data have not been adjusted for inflation.

· Real data have been adjusted for inflation. They are reported using prices from a common base year.

· The shoe leather costs of inflation are the wasted time and inconveniences caused when inflation encourages people to reduce their holdings of currency.

· The menu costs of inflation are the costs associated with changing the prices of the products sold by a business.

· Purchasing power is the value of the products a person is able to buy with a given amount of money.

· Indexation refers to using a law or contract to automatically correct a dollar amount for the effects of inflation.

· Cost-of-living adjustments (COLAs) automatically increase Social Security benefits to compensate for the loss in purchasing power caused by inflation as measured by the Consumer Price Index (CPI).

· Cost-push inflation is an increase in the price level caused by higher costs of production.

· Demand-pull inflation is an increase in the price level caused by excess demand for newly produced goods and services. Society’s demand for new products exceeds its ability to produce them.

· "Too much money chasing too few goods" is an expression that describes demand-pull inflation, which is an increase in the price level caused by excess demand for newly produced goods and services. Society’s demand for new products exceeds its ability to produce them.

· The quantity theory of money suggests there is a relationship between the supply of money and the inflation rate. If the money supply increases faster than an economy’s output, a likely outcome is inflation.

· A price index is an estimate of the price level that is used to measure inflation. Three commonly used price indices in the United States are the Consumer Price Index (CPI), the Producer Price Index (PPI), and the GDP deflator.

· A basket of goods is a collection of products used to calculate a price index.

· The base year is the year that is used as the comparison year when calculating an index.

· The Consumer Price Index (CPI) is a measure of the price level based on a fixed basket of the goods and services purchased by a typical urban family. It is used to calculate the inflation rate.

· The Producer Price Index (PPI) is a family of indices that measures the price level based on a fixed basket of all goods and services produced and sold by American businesses. It includes consumer products and goods and services used as inputs in the production of other products.

· The GDP deflator is a measure of the price level based on all goods and services produced in a country in a particular year. Unlike the CPI and PPI, the GDP deflator is not based on a fixed basket of goods.