What is inflation?

A Macroeconomic datum capable of influencing Monetary Policy decisions

In an economy, inflation indicates a generalised and continuous growth in prices over a period of time.

Calculation of inflation requires the construction of a consumer price index and in most countries measurement of this index is assigned to the national institute of statistics.

The consumer price index is a statistical tool used to measure the changes over a period of time in a group, referred to as a basket, of goods and services, representing the typical purchases made by a country’s households.

As regards Italy, the national institute of statistics is ISTAT, which elaborates three separate consumer price indices: the NIC index for the whole nation, the FOI index for blue and white-collar worker households, and the harmonised EU consumer price index HICP.  The latter is extremely significant, since it is used as an indicator for verifying convergence in the economies of EU (European Union) member states, with a view to their continued inclusion or admittance to the Monetary Union.

Inflation is therefore a key macroeconomic datum, closely followed by economists, since it can affect the monetary policy decisions on the part of the world’s Central Banks.  The primary objective of the Central Banks is in fact to maintain price stability, a circumstance which experts claim is one of the fundamental conditions for raising the level of economic activity and employment.

Inflation in excess of the tolerance limits imposed by the financial authorities leads the Central Banks to implement restrictive monetary policies, which consequently imply an increase in interest rates.  Due to the potential repercussions of such decisions on market performance, inflation is carefully monitored by all financial operators