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The consumer price index (CPI) is an economic measure that tracks inflation in an economy. Inflation can occur for many reasons, with economists often debating the current and past causes of this phenomenon. An increase in CPI can be the result of one of two options: demand-pull or cost-push inflation. Any theories about an increase in CPI typically fall under one of these two general economic concepts. The first theory states inflation occurs as too many dollars chase to few goods, while the other states that, when business costs increase, so do consumer prices, so companies can maintain profits.
Demand-pull inflation is a naturally occurring concept in growing economies. As demand grows quicker than supply, inflation goes up, leading to an increase in CPI. This occurs naturally because consumers simply have more money to spend, meaning they will create more demand for the supply of goods. At some point in this economic situation, supply should — in theory — rise to meet the demand for goods and services. Inflation then decreases as the market reaches equilibrium in the long run.
Cost-push inflation is the second overarching theory to explain inflation and any increase. Under this theory, companies experience increasing costs for the goods or services they produce. These increases can occur for a variety of reasons, such as lack of availability, demand increases for resources, or government intervention, such as tariffs or taxes. When companies experience these cost increases, they pass on the cost increase to consumers. Therefore, increases in prices for goods and services create an increase in CPI through the concept of pass-through costs.
Using these two main theories of inflation, explanations for a nation’s change in prices can be made. For example, a change in product quality can lead to an increase in CPI. A company that refines raw materials to a greater degree than they did before often experiences price increases for products. CPI increases as the higher-quality prices hit the market. The introduction of new goods may also cause an increase in the CPI; for example, new products in a market generally cost consumers more money, leading to inflation increases.
Economists generally look at specific goods when they create CPI calculations. Once they discover a price increase happens, economists may look further to discover why the inflation occurred. That is where the two above theories come into play, explaining the specific rise in inflation.
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