Abstract

When price adjustment is sluggish, inflation is costly in terms of welfare because it distorts various kinds of relative prices. Stabilising aggregate price inflation does not necessarily minimise these costs, but stabilising a well-designed core inflation minimises the cost of relative price fluctuations and thus the cost of inflation.

Introduction

In macroeconomic theories, the aggregate price level, often denoted as P, is defined as the monetary value of the minimum cost of attaining a reference utility level. Measures of the price level are called a “cost-of-living” index. Measuring the price level has been an important topic in macroeconomics, because any fluctuation in the price level —inflation— is regarded as affecting the well-being of households.

2015.02

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