Can You Explain The Concept Of Inertial Inflation For Me?


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Tariq Habib answered
In modern industrial economies like the United States inflation is highly inertial. That is it will persist at the same rate until economic events cause it to change. We can compare inertial inflation to a lazy old dog. If the dog is not shocked by the push of a foot or the pull of a cat, it will stay where it is. Once disturbed, the dog may chase the cat, but then it eventually lies down in a new spot where it stays until the next shock.

During the 1990s, prices in the United States rose steadily at around 3 percent annually, and most people came to expect that inflation rate. This expected rate of inflation was built into the economy's institutions. Wage agreements between labor and management were designed around a 3 percent inflation rate; government monetary and fiscal plans assumed 3 percent rate. During this period the inertial rate of inflation was 3 percent per year. Other names sometimes heard for this concept are the core, underlying, or expected inflation rate. The rate of inflation that is expected and built into contracts and informal arrangements is the inertial rate of inflation.

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