What is inflation? Economist Ola Olsson explains
The fact that inflation is currently high has probably not escaped anyone. When Statistics Sweden (SCB) reported the Swedish inflation figures for February, the media coverage was intense, and sometimes it is difficult to keep up. Ola Olsson, Professor in Economics, helps us better understand what inflation is and how it affects us.
Consumer Price Index – CPI
An index that measures the average price development for private Swedish consumption, the actual prices that consumers pay. The measure is based on the so-called ”CPI basket” which includes a selection of goods and services such as food, clothing, housing, and culture.
Consumer Price Index with fixed interest rate – CPIF
CPIF is a complementary index measure that is not affected by changes in mortgage rates. In this measure, household mortgage rates are held constant. Otherwise, it includes the same goods and services as CPI.
Inflation target
The Riksbank wants inflation to be low and stable, and since the mid-1990s, Sweden has had an inflation target of 2 percent. The idea is that if households and companies have a benchmark for inflation, it guides economic expectations, which leads to a functioning price and wage formation.
Core inflation
A measure of inflation where certain goods and services are not included in the measure. It is often referred to as ”cleaned for xxx”. In Sweden, when we talk about core inflation, it means Consumer Price Index (CPI) minus energy prices, while when the US Federal Reserve talks about core inflation, they have cleaned for both energy and food prices.
Underlying inflation
Price Index, but without temporary effects and foreign impulses.
Hyperinflation
There is no exact definition of hyperinflation, but it refers to at least a 50 percent increase from the previous month. The most well-known example is Germany in the 1930s.
Demand-pull inflation
When demand for goods or a service is so high that the market cannot produce the demanded item, which pushes prices upward. Usually occurs in boom times when consumers have a lot of money.
Cost-push inflation
When it becomes more expensive to produce goods or a service, for example, because wages go up, and those who provide the goods or service raise the price.
Imported inflation
When the cost of goods imported to Sweden increases. It may apply to both foreign raw materials that Swedish companies need to manufacture their goods or goods that consumers use more directly. In both cases, Swedish companies’ costs increase, and they, therefore, raise their prices.
Expected inflation
When people expect prices to go up and, therefore, demand and get higher wages. When people then have more money in their wallets, they buy more, and it is likely that companies raise their prices to earn more. This leads to actual inflation.
Actual inflation/inflation
Goods and services become more expensive, which means that your money does not go as far. You need to earn more to be able to buy the same amount.