3. What are the causes of inflation? How is inflation measured?

Indices for inflation assessment

To assess inflation over a certain timefarem, special indices are used.

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  Consumer Price Index (CPI) demonstrates the change of average-weighted prices for goods and services in the basic basket over certain time. This is so-called consumer inflation that includes food, clothes, medical services, etc.
  
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  Producer Price Index (PPI) evaluates the average change in selling prices of domestic producers of goods and servies. It evaluates price changes from the seller’s point of view and includes production of consumer goods, capital equipment, crude materials processing, etc.
  
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  Wholesale Price Index (WPI) is another inflation index that evauates and tracks changes in the prices for goods at the stages before they get to retailers. To calculate it, we use the price for a set of goods that are essential at the first stage of commercial operations.
  

Inflation can be provoked by a bunch of factors. The most widespread of them are:

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  Inflation of demand appears when the demand for certain goods and services exceeds the ability of the economy to satisfy it. When demand exceeds supply, prices experience upward pressure, which generates inflation. The most obvious example is the growth of inflation indices due to the growth of the demand and price for energy carriers.
  
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  Inflation of costs shows itself as the growth of prices provoked by an increase in wages and costs of materials. These costs, as a rule, fall on the consumer in the form of increased prices for goods and services.
  
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  Increase in money supply: the overall quantity of money in turnover grows, including cash, coins, and money on banking accounts. If money supply grows faster than goods are produced, this might provoke inflation. Money supply is normally regulated by the Central Bank of the country.
  
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  Devaluation is the decrease in the exchange rate of the national currency, which brings down its purchasing power. Devaluation of the currency stimulates export, making overseas clients buy more domestic goods, while foreign goods become more expensive.