The charts above display the historical inflation rates for various countries, as measured by the yearly change in the Consumer Price Index (CPI). High inflation indicates rising prices for goods and services, diminishing the purchasing power of the currency and potentially decreasing its value on the foreign exchange market. Conversely, deflation occurs when prices drop, enhancing the currency's purchasing power. While deflation might seem beneficial in the short term, it can lead to reduced consumer spending as people delay purchases, anticipating lower prices. This behavior can result in decreased business revenue, layoffs, and ultimately, slower economic growth.
The CPI tracks the price of a basket of diverse goods and services such as housing, food, transportation, and healthcare, and serves as a key indicator of price levels in an economy. In the United States, the CPI is calculated by the Bureau of Labor Statistics (BLS).
Central banks, such as the Federal Reserve, manage inflation by regulating the money supply, using tools like interest rate adjustments and quantitative easing. Lowering interest rates and implementing quantitative easing can stimulate economic activity by making borrowing cheaper and credit more abundant, useful for addressing low inflation or deflation.
Conversely, by raising interest rates and shrinking its balance sheet, the Fed can cool down an overheated economy. This approach raises the cost of borrowing and reduces the amount of currency in circulation, helping to keep inflation in check.
The chart above shows a heat map depicting the correlation coefficients between various countries' inflation rates. Countries are listed along both the x and y axes, with the intersection points displaying the correlation's intensity and direction. A +1 correlation coefficient denotes a perfect positive correlation, meaning the inflation rates of two countries moved in tandem within the given period. On the other hand, a -1 coefficient indicates the rates moved inversely.
The minimum spanning tree (MST) simplifies the data from the correlation matrix above by retaining only the strongest correlations. When two inflation rates are connected in the MST, it indicates a positive correlation, suggesting that they tend to move in tandem.
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