Inflation is a currency phenomenon that refers to currency depreciation caused by the amount of currency issued exceeding the actual amount of currency needed in circulation. Inflation and price rise are different economic categories, but they are related to a certain extent. The most direct result of inflation is price rise.

The inflation rate (Inflation Rate) is the ratio of the excess currency issuance to the actual amount of currency required, and is used to reflect the degree of inflation and currency depreciation.

In economics, the inflation rate refers to the rate of increase in the general price level within a certain period (usually one year).

Using the analogy of a balloon, if its volume is the price level, the inflation rate is the expansion speed of the balloon. In other words, the inflation rate is the rate at which the purchasing power of money decreases.

In practice, it is generally not possible to calculate inflation directly, but it is expressed indirectly through the growth rate of the price index. Since the consumer price reflects the final price of goods through various links of circulation, it most comprehensively reflects the demand for money from commodity circulation. Therefore, the consumer price index is the price index that can most fully and comprehensively reflect the inflation rate. At present, countries around the world basically use the consumer price index (called the consumer price index in our country), that is, CPI, to reflect the degree of inflation.

Inflation rate calculation formula

Inflation rate = (current price level, base period price level)/base period price level

The base period is the selected year The price level is used as a reference, so that the price level in other periods can be compared with the base period level to measure the current inflation level. In fact, the above mentioned is only one of the three methods of measuring inflation level, the consumption index conversion method, but it is the most commonly used. In addition, there are the GDP conversion method and the production index conversion method.

After the 1970s, as floating exchange rates replaced fixed exchange rates, the impact of inflation on exchange rate changes became more important. Inflation means an increase in domestic price levels. When the prices of most goods and services in an economy generally rise for a period of time, the economy is said to be experiencing inflation. Since prices are the monetary expression of the value of a country's goods, inflation also means a decrease in the value represented by the country's currency. In the case of domestic and foreign commodity markets that are closely linked to each other, generally, inflation and domestic price increases will cause a decrease in exported goods and an increase in imported goods, thereby affecting the supply and demand relationship in the foreign exchange market and causing the country's exchange rate to fluctuate. . At the same time, the decline in the domestic value of a country's currency will inevitably affect its external value and weaken the credit status of the country's currency in the international market. People will expect that the exchange rate of the country's currency will weaken due to inflation, and hold the currency in their hands. The national currency is converted into other currencies, causing the exchange rate to fall. According to the law of one price and purchasing power parity theory, when the inflation rate of one country is higher than the inflation rate of another country, the actual value represented by that country's currency is decreasing relative to the currency of another country, and the currency exchange rate of that country will decline. On the contrary, it will rise.

For example, before the 1990s, an important reason why the exchange rates of the Japanese yen and the former West German mark were very strong was that the inflation rates in these two countries had been very low. The inflation rates in the United Kingdom and Italy are often higher than the average levels of other Western countries, so the exchange rates of these two currencies are in a downward trend.

Three main indicators to measure changes in inflation rates:

(1) Producer Price Index (PPI)

Producer Price Index ), is a price index that measures what manufacturers and farmers sell to stores. It mainly reflects the price changes of production materials and is used to measure the cost price changes of various commodities at different production stages.

(2) Consumer Price Index (CPI)

Consumer Price Index is a measurement of the price of a fixed basket of consumer goods, mainly reflecting the price paid by consumers. The price changes of goods and services are also a tool to measure the level of inflation, expressed as a percentage change.

(3) Retail Price Index (RPI)

Retail Price Index refers to the price index of retail goods paid in cash or credit card.

The U.S. Department of Commerce conducts nationwide sample surveys of retail goods every month, including furniture, electrical appliances, supermarket products, medicines, etc., but various service industry consumption is not included. Auto sales constitute the largest single component of retail sales, accounting for approximately 25% of the total.

Many foreign exchange market analysts attach great importance to examining changes in the retail price index. The rapid development of social economy and the increase in personal consumption will lead to an increase in retail prices. The continued rise of this indicator may bring about rising inflationary pressure, causing the government to tighten the money supply. The rising interest rates will bring benefits to the country's currency. support. Therefore, a positive trend in the index is also theoretically positive for the country's currency.