What is the inflation triangle model?

The inflation triangle model is a way to examine inflation, derived from what is called the phillips curve . In the triangle model, inflation is considered to be driven by three different types of inflation: built -in inflation, cost inflation and demand inflation. Given certain principles of macroeconomics, such as what is called a spiral of prices, this inflation has never disappeared. Instead, built -in inflation becomes an expected part of the economy. In the triangle model, the built -in inflation consists of a triangle base. Inflation of push costs occurs when the cost of something in the economy rises and the disagreement can easily be replaced. PUSH costs often occur when external suppliers of key product or services increase their costs and the import economy is forced to pay higher prices.

The classic example of inflation of costs or costs is the oil crisis that occurred in the 70s. When the organization youThe binding oil countries (OPEC) increased oil prices, the United States was forced to pay higher prices. Since oil is used in virtually every sector, it sent these supply waves in the United States and the total prices have risen, while the wages paid remained the same. It should be noted that not all economists agree on the existence of inflation of push costs-mere important economists such as Milton Friedman, claim that the final cause of inflation in these cases is the government increase in money supply.

Inflation of demand, the third side model of the triangle is perhaps the most important aspect of the triangular inflation model. It is primarily from the Philips curve, which describes the demand that the triangle model was derived. In principle, the theory of inflation of demand stipulates that there is a point where the demand for a product in the company surpasses the company's ability to produce this product. As the unemployment level decreases and the total expenditure increases, eventually becomes a lack of products. This deficiencyIt puts on an increase in these products - which results in inflation.

Fortunately,

Inflation of demand so much tends to be relatively short in most modern economies. Because no modern company is full of employment - which basically has a level of unemployment of 0% - and because technology is constantly developing, product production can generally be increased. As production increases, the lack is alleviated and the prices will drop again. However, prices often turn back completely back to the previous levels, resulting in some built -in inflation.

Although each of these three types of inflation may seem at first glance to be disconnected if we look at them closely looking for a connection. It was this understanding of the interconnection of these three integral types of inflation that led to the formulation of the model of the triangle inflation. The Philips curve was in itself considered to be inadequate to explain inflation, and the triangle model took another step towards a better solution to most inflation in modern societies.