If a price increase isn't inflation, then what is it?

Joe Lebow, an analyst, is discussing the difference between inflation and price level. Lebow states: "The higher the price level in the current year compared to the price level in the previous year, the higher is the inflation rate of a country. Any increase in the price level is evidence of positive inflation."

I thought this statement was accurate. I was told it was false on the basis of "Lebow is incorrect because a one-time increase in the price level is not necessarily inflation. Inflation is an on-going process, not a one-time increase in the price level. "

I dunno man, that sounds like a sketchy question. I wanted to hear what S2000 had to say about this.

if saudis stop producing oil price increase bc of inflation?

Inflation is the price increase based on the devaluation of currency, therefore price levels of almost all goods and assets increase as a result.

Any other price increases normally would be due to forces of supply and demand, and usually exclusive to one or more set of goods and assets.

Devaluation of currency with respect to . . . what, exactly?

hmmmm

Well I guess no, that would be short-term supply vs demand issues that would be raising the price, not inflation in the traditional sense.

However, I would argue that oil prices alone increasing would not qualify as an increase in overall price level. When I think of the word inflation, I’m thinking of the CPI (milk, gas, housing etc combined)

Regardless, your point stands and I will remember your post when exam time rolls around and this tricky question pops up. Thanks.

I quote from Schweser 2014, Volume 2, p. 161, paragraph 7:

_ Inflation is a persistent increase in the price level over time._

Thus, a one-shot increase in the price level is not inflation; only a persistent increase (over several periods) in the price level is inflation.

igor’s example refers to only one good, not to the overall price level, so it isn’t really relevant to this question.

With respect to it’s own purchasing power first and foremost. It can be with respect to other currencies and standards as well, depending on the magnitude and cause of inflation.

So you’re saying that if the price level (measured in, say, dollars) increases – if stuff costs more dollars to buy – then one dollar buys less stuff.

True, of course, but hardly profound; i.e., it doesn’t explain anything.

It does explain the difference between an inflationary price increase, and one based on supply and demand.

One is more universal to the price of all goods and services in the economy, since the local currency is the unit of money used, so the value of the dollar (for example) goes down keeping other relative values between goods constant (for the sake of explanation), therefore price levels go up. Printing just as much new money by the central bank without additional production should double the prices of all goods and services (hypothetically of course).

The other common reason for price increase is forces of supply and demand, and usually exclusive to one or more set of goods, whether based on the raw materials, or competitive advantage to name a few.

Alas, it doesn’t.

Merely saying that a dollar buys less stuff doesn’t – in and of itself – explain _ why _ a dollar buys less stuff.

I never attempted to explain why inflation occurs nor I think was even the topic on hand, but about differentiating between inflationary and non-inflationary price increases.

And _ my _ point is that whether the price increase is inflationary or not, a dollar still buys less: saying that the purchasing power of the currency has declined _ doesn’t _ differentiate the two.

If the price level of an uncorrelated basket of goods increases y-o-y relative to fixed unit of currency, then it’s inflationary. There are several measurments of inflation, and explanatory theories for why it occurs, and how to control it.

According to the Level I definition of inflation, it has to be persistent. A one-time increase isn’t inflation, by definition.

That’s the point of the original question. You’re getting into a lot of material that doesn’t help a Level I candidate pass the exam, which is, arguably, what the original poster wants to do.

This is actually a really good explanation of the difference between Price Level and Inflation. The price level usually relates to a specific good, service or security. A change in price level of a given good will effect said good’s value in terms of both currency and another comparable good’s value. Inflation however will only affect said good’s value in terms of currency, not in terms of the value of other goods.

For example: Oranges vs. Bananas

If 1 orange is worth $1, which is equal to the value 2 bananas, and the price of oranges goes up becuase of a shortage in oranges, one orange will be worth more than $1 and more than 2 bananas (price level increase = increase in value because of the supply and demand of the product itself). If inflation occurs instead, 1 orange will now be worth more than $1 but will still be worth 2 bananas, and 2 bananas will now also be worth more than $1 (the currency is losing value). If the price of oranges alone persistently increases year over year, that is not inflation, it could simply mean that the supply of oranges is persistenly decresing year over year. If the price of all goods and services in the economy persistently increases year over year then that is defined as inflation. However, note that the supply and demand of money itself does affect inflation. If the Fed increases the money supply in the economy year over year, then the value of of the Dollar will persistenly decrease resulting in inflation.

Ivestopedia gives a pretty straightforward defnition of Inflation

http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/consumer-price-index.asp

Price changes can be broken down into two components, a real component and an inflationary component. A change in real price is often explained by an increase in the product’s intrinsic value which pushes up a market price. The inflationary component is linked to the overall monetary environment of an economy (e.g., a situation often seen in developed economies is that demand will tick up during an upswing in the business cycle, this forces companies to increase hiring to ensure that production meets demand, this increases demand for labor thus and pushes up the cost of labor, and this cost is often passed through to the consumer via higher prices. The increase in price here is not the result of the product’s intrinsic value rising but rather the cost environment.)

In short, an increase in prices could be the result of inflation, an increase in real value, or both.

I am so lucky to have you all on this board with me. Thanks a ton.