Inflation is a risky situation for any economy since it faces a crisis in terms of scanty supply of products whereas the demand for goods and services are on a rise. The supply of money increases and that is precisely the reason behind the devaluation of money which in turn negatively affects the demand of the masses. Inflation Analysis contains a vivid description of the factors that are responsible for inflation. The analysts assess the situations and the various factors regarding inflation.
The biggest problem is to maintain a stability in the price in general. To maintain stability the monetary policy must be flawless and the government must continue to formulate or if required may even renovate the monetary policies with a view to stabilize the prices. The effort is put mainly to maintain the stability in the areas where Euro is the medium of transaction. The analysis of inflation is based on certain structural models formulated by the Central Bank.
Models of Inflation AnalysisThere are various models that are followed by the accountants to analyze inflation. The models are:
- Inflation Indicators have some forecasting powers that are quite useful to the analysts. But they are slightly complex and due to their complicated nature it becomes difficult for the analysts to use them indiscriminately.
- Time Series Models utilizes only the time series properties to predict economic situations unlike the structural models.
- ARIMA Models are also used to predict inflation. ARIMA Models are used to trace short-term changes which in turn influence the long-term changes in the market.
- BVAR Models were introduced by Doan, Simms and Litterman. It is a dynamic model which traces the changes individually.