Inflation and its impact on monetary policy and interest rates

Have you noticed that your food costs are increasing every year?

The average weekly cost of food last year was $100, so how much will you spend this new week?

From the above examples we can conclude that inflation is a significant increase in the prices of goods and services, some of which rise and some of which fall.

Inflation equals to say an increase in prices… More specifically, the sum of what you bought in 2020, say $1,000, what you bought with $2,000 in 2021… which means your country’s currency is less than last year.

An increase in inflation affects:

The purchasing power of the population

Total population cost

However, consumers are the first and last to bear the changes that have caused the devaluation of the country’s currency and rising costs to slow the economy.

In any case, inflation is a bad or negative phenomenon for the state. It is not a case.. that is how it is!

Inflation can stimulate economic growth if consumers respond to price expectations, and buying now rather than delaying it increases inflation, thus increases production and lowers unemployment.

Persistent inflation occurs when a country’s money supply exceeds its economic growth rate.

Central banks around the world have appropriate monetary policies in place to keep annual domestic inflation within acceptable limits.

From here, the relationship between monetary policy and inflation begins to become clearer… For example, the common goal of central bankers in advanced economies is inflation between 2% and 3%.


For example, the Federal Reserve’s annual inflation target is 2%.

The European Central Bank’s annual inflation target is “just under 2%”.

Monetary policy and inflation are two factors that have a serious impact on price movements in financial markets, often leading to significant changes in various financial assets.

Inflation changes its effect on economic activity and competitiveness among countries.. Therefore, companies must monitor rising costs and prices. This is by evaluating the competitive environment to understand how to respond to rising costs and prices.

How to measure inflation:

Inflation is calculated in different ways depending on the type of goods and services involved.

The most well-known measure of inflation is the Consumer Price Index (CPI), but there are other measures of price growth, such as the Producer Price Index.

Other indices are rarely used to calculate inflation, other than the data provided by the indices. So it is better to focus on the consumer price index.

The consumer price index is produced by determining the weight or relative importance of products and services in typical household spending in a given base year, and then measuring the price of the basket of goods in future years.
Inflation is measured by the consumer price index:

The CPI measures the percentage change in the price of the basket of goods and services most used by households (repeated demand during the month).

baskets (scales), there are bound to be differences in measures between households.

Does not include food and energy products.

There is another measure called the Product Price Index:

Producer Price Index A measure of inflation that consists of a group of indicators that measure the average change in prices.

That is, price changes are seen from the seller’s perspective and not from the buyer’s perspective. This is the difference between it and the consumer price index.

Using this indicator to calculate inflation, increases in the prices of ingredients such as oil can offset declines in the prices of other ingredients such as wheat and corn.

Inflation calculations vary by country. In some countries, the National Bureau of Statistics calculates quarterly and annual data on the Agricultural Producer Price Index.

There are other countries like the United States, Germany, France, etc. This indicator is calculated on a monthly basis.

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