Binary options lexicon: Decryption and explanation of inflation

The term “inflation” can raise many questions, especially since it is frequently used in the media. If you trade binary options, it is very important to understand this term so you can anticipate the trends that certain assets, such as raw materials, stocks, currencies and indexes, will follow.

Definition of inflation: Inflation refers to the general increase of prices. It can also be stated as a decrease in the value of a currency. Currency is a standard of values, so its’ variation cannot be measured in a direct manner. Its’ evaluation stems from changes in consumption prices of goods and services. Inflation is also characterized by the growth of actual currency found in circulation.

How inflation is calculated: In France, inflation levels are evaluated using the Consumer Price Index. The measure is produced by l’Insee and serves as a basis indicator for the French government for increases to the SMIC. Within Europe and especially within the European central bank system, the Harmonized Index of Consumer Prices (HICP) is the preferred indicator.

The different levels of inflation: Several inflation levels exist: price stability with an inflation rate under 2%; rampant inflation between 3% to 4% per year; open inflation with increases which fall between 5% to 10% (at times hitting 20%); and galloping inflation or hyperinflation which is defined by inflation greater than 20%.

Causes of inflation: Inflation is caused by many factors: Inflation caused by demand, where prices increase because of a growth in demand. There is also cost push inflation which is due to increases in production costs related to increases in salaries and sometimes the price of raw materials.
There is also monetary inflation, caused by an increase in the actual money in circulation. This inflation occurs as the outcome of significant increases in the amount of currency. Experts don’t all agree about the impact of different monetary policies, as many theories exist about the effects of these policies on price increases.

Inflation is rarely homogeneous which means that prices and revenues do not necessarily increase at the same rate in the same way in all business sectors, thus causing tension between economic agents (reduction in purchasing power, profit redistribution, etc.) This reveals a struggle for the sharing of wealth.


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