What drives inflation?
Confused about what is driving inflation? Relax. You are at the right place! Continue to read and get to know the most important factors for what drives inflation.
A rise in prices caused either by an increased demand or by increasing cost pressures. Demand inflation, demand pull, are caused by an initial increase in demand driven by a continuous increase in money supply. At a cost inflation, cost push, the increase is caused by an increase in wages or in raw material prices.
If you want to see how inflation will evolve in the future, there are a number of economic indicators to watch. Below is a review of these indicators – used by both central banks and forex trading analysts, to get an indication of future inflation. By looking at these indicators is also a good picture of how a country’s economy will develop.
Here are the most 5 most important factors for what drives inflation:
Producer Price Index (PPI)
Producer Price Index, PPI, provides information on price developments from producer, and can provide a picture of future inflation, since these prices in some cases tend to be passed on to consumers. But it is no longer as common to transfer these costs equally. In other words, one can say that the importance of PPI in order to predict the Consumer Price Index (CPI) has declined.
One reason for this is that fierce competition means that companies choose not to raise prices, but instead tries to compensate in other ways, or simply let the profit margin to fall.
Then you should consider that producer prices are only part of the final price paid by consumers. One should also bear in mind that all goods produced in one country may not necessarily be used for domestic consumption but much out of them goes to export and where to not affect the country’s CPI. Something that is relevant for exporting countries, like Germany, where exports account for a large proportion of its GDP.
The capacity utilization rate indicates how much of the corporate capacity is utilized. If the capacity approaches 100% and demand is constant, it will lead to the increased prices because of all resources to produce more have been used.
By looking at the industry’s new orders can assess the short-term demand will be and therefore you get a picture of capacity-implementation development. For Great Britain, the capacity utilization tends to be at just under 90% during August, 2009.
Unemployment and inflation
If the number of unemployed people is falling, it means that companies have begun hiring new workers and that economic activity is increasing while the wages might rise. Reduced unemployment can thus sometimes be a first sign that inflation begins to rise.
Wage can play a small role, but as we mentioned earlier, it can be fueled by productivity increases. It is important to look at the collective agreements which provides for the future. These agreements usually go two to five years away and it can give a good picture of the future wage growth. Collective agreements, however, is something that affects inflation in the long term.
Did we forget anything about what drives inflation? Please contact us in that case…
Article written by Athanasios Karagiannis and Markus Jalmerot.