Inertial inflation is a situation in which all

price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...

s in an

economy An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

are continuously adjusted with relation to a

price index A price index (''plural'': "price indices" or "price indexes") is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a specific region over a defined time period. It is a statistic ...

by force of

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

s. Changes in price indices trigger changes in prices of goods. Contracts are made to accommodate the price-changing scenario by means of

indexation Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation, while deindexation is the unwinding of indexation. It is often used to make sure regular paym ...

. Indexation in a high-inflation

is evident when, for instance, a given price must be recalculated later to incorporate inflation accumulated over the period to "correct" the price. In other cases, local currency prices can be expressed in terms of a foreign currency. At some point in the future, prices are converted back from the foreign currency equivalent into local currency. The conversion from a "stronger" currency equivalent value, the foreign currency, is intended to protect the real value of goods, as the

nominal value In economics, nominal value refers to value measured in terms of absolute money amounts, whereas real value is considered and measured against the actual goods or services for which it can be exchanged at a given time. Real value takes into acc ...

depreciates. In the medium and long terms, economic agents begin to forecast

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

and to use those forecasts as '' de facto'' price indexes that can trigger price adjustments before the actual price indices are made known to the public. That cycle of forecast-price adjustment-forecast closes itself in the form of a

feedback loop Feedback occurs when outputs of a system are routed back as inputs as part of a chain of cause and effect that forms a circuit or loop. The system can then be said to ''feed back'' into itself. The notion of cause-and-effect has to be handle ...

, and inflation indices get beyond control since current inflation becomes the basis for future inflation (more formally, economic agents start to adjust prices solely based on their expectations of future inflation). At worst, inflation tends to grow exponentially and leads to

hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real versus nominal value (economics), real value of the local currency, as the prices of all goods increase. This causes people to minimiz ...

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Excerpts from a speech given by

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

Governor Ben S. Bernanke on indexation and structuralism.

A paper by former

Brazil Brazil, officially the Federative Republic of Brazil, is the largest country in South America. It is the world's List of countries and dependencies by area, fifth-largest country by area and the List of countries and dependencies by population ...

ian Minister of Finances Luiz Carlos Bresser-Pereira on the developments of the inertial inflation theory by Brazilian economists and the theoretical basis of the Plano Cruzado. * While "''Structural inflation"'' gives a

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

cause for inflation, the "Structuralism" school argues that non-monetary causes dominate. Inflation {{econ-stub

See also

External links