Generalisation of Inflation

Generalised inflation means that prices are rising across a wide range of goods and services, rather than only for a few products. It involves both breadth and persistence: price increases spread across the consumption basket and continue over time, producing a sustained rise in the overall price level.

Breadth: how widely prices are rising

Breadth concerns the spread of price increases across different categories of expenditure. Generalised inflation does not require every price to rise, or all prices to rise at the same rate.

• An isolated price increase, such as a rise in one vegetable’s price after a supply disruption, changes that item’s price relative to others; it does not by itself establish generalised inflation.
• Inflation becomes broad-based when price increases extend across many goods and services rather than remaining concentrated in a small group.
• A weighted price index such as the Consumer Price Index (CPI) can rise because of sharp increases in a few important items, so the headline rate alone does not establish breadth.

Persistence: how long price increases continue

Persistence means that upward pressure on prices continues rather than disappearing after a temporary disturbance. Breadth and persistence must therefore be examined together.

• A one-time rise in the price level is different from continuing inflation: prices can remain high without continuing to rise.
• Repeated price increases across several categories provide stronger evidence of persistent inflation than a short-lived spike in one category.
• A falling inflation rate means that the overall price level is rising more slowly; it does not necessarily mean that prices are falling.

How inflation spreads and why it matters

An initial price shock can become generalised if it raises costs elsewhere in the economy or changes expectations about future prices.

• Higher energy or transport costs can feed into the prices of many other products through cost pass-through.
• If households and firms expect continuing inflation, wage demands and price-setting decisions can reinforce its persistence through inflation expectations.
• Monetary policy cannot directly repair a crop failure or produce additional fuel, but it can restrain demand and help anchor expectations, limiting the spread and persistence of inflation.