Published on July 30, 2020   18 min
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Hi. My name is Mariano Torras. I'm a Professor of Economics at Adelphi University in New York. We're going to be doing a lecture series on macroeconomics.
Ask anyone what inflation means and chances are, you will get an inaccurate answer. If for example, the price of movie tickets has been on the rise, this is not indicative of inflation. Inflation refers to an increase in average prices across the economy. Even if there were a general downward trend in the prices of electronic goods, for example, it would not therefore mean that inflation is not present. An increase in average prices would result in a decline in the domestic value or purchasing power of the currency since a unit of the currency would now be able to buy less. Inflation is almost always related to changes in the money supply, which is itself governed by monetary policy, to be discussed in a later lecture. Finally, while domestic inflation is often related to the exchange value of the domestic currency, it is important to understand that the two concepts are separate and distinct.
Inflation is represented by changes over time in the consumer price index, or CPI which we briefly discussed in lecture number 2. Core inflation is given by changes in a modified CPI that does not count food and energy prices, which tend to be more volatile than the prices of other goods. The CPI is used in the United States as well as in the European Union. Although the European Central Bank uses a Harmonized Index of Consumer Prices to account for differences in measurement methods across different European countries. The producer price index and GDP deflator are price indexes that we have already seen, but these are not typically used to represent domestic inflation. Finally, there also exist lesser known measures of commodity or asset price inflation, as well as of other categories of goods. But unless used for some other specific purpose, the term inflation in economics always refers to prices of consumer goods.