Inflation: why is it produced and how is it measured?

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Converted into one of the words that every month captures the attention of those who for one reason or another are interested in the performance of our economy, the It tends to be a matter of concern for many, especially for those who direct the destinies of the country.

But what is inflation and how is it produced? According to the glossary of terms of the , inflation is the “Persistent increase in the general level of prices in the economy, with the consequent loss of the purchasing power of the currency”.

Meanwhile he Peruvian Institute of Economics (IPE) complete this definition by pointing out that inflation is “The generalized and sustained increase in the prices of the goods and services existing in the market over a period of time”.

And although –as the IPE points out– it is a “Phenomenon that occurs in almost every country in the world and directly impacts citizens”, its measurement in the case of our country is done –generally– through the variation of the consumer price index (CPI).

As explained by the BCR, the CPI measures the evolution of the cost of the consumer basket and the monitoring of inflation is carried out through its evolution in Metropolitan Lima.

“In Peru, as in most countries, the consumer price index is officially calculated using the Laspeyres formula, which compares the value of a basket of consumer goods typical of families, to current prices, with the value of the same basket in a base year “, they affirm.

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In our country the National Institute of Statistics and Informatics (INEI), as the governing body of the national statistical and informatics systems, is in charge of their measurement and dissemination every month.

Different are the factors that can give rise to an inflationary phenomenon, not only economic but also political, local and external. For that reason, the IPE recommends that “From the Executive and the Legislative, measures are taken to reduce uncertainty regarding the direction of economic policies” because that would help reduce the contribution of local factors on inflation.

According to the book “Economics for all” of the Instituto Apoyo, among these factors we can mention the increase in certain prices that significantly affect the price of other products (wages, gasoline or dollars), the fiscal deficit (excess government spending) or the inflationary expectations themselves (the fact that people expect inflation).

But sometimes, Inflation also responds to transitory factors and situations that a Central Bank cannot usually control., such as the price of oil and other international products (wheat, sugar, etc.) and climatic factors (El Niño or La Niña) that impact the national supply of products.

While in a phenomenon like hyperinflation – which is defined as “A very high inflation and out of control, which causes a precipitous drop in purchasing power”-, the main causes are the financing of spending by issuing money without any control, war situations, economic depressions and political or social crises.

In addition to the uncertainty that it may bring, inflation –a say the IPE– has important effects on the production of the economy and, therefore, the BCR aims to control it.

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