<p>The components of aggregate demand are government consumption, consumption, investment, net exports. </p>

<p>While people typically assume there is a relationship between demand shocks and inflation, this does not mean that inflation will necessarily go up whenever consumption goes up, because consumption depends not only on demand shocks but also many other things that will not necessarily affect inflation in the same way. For example, if consumption goes up because labor productivity and incomes increase, inflation may even go down. On the other hand, if the central bank decreases the interest rate, demand will increase and this will cause an increase in inflation.</p>

CC BY-SA 3.0
2017-08-09T10:23:03.663Z
"For example, if consumption goes up because labor productivity and incomes increase, inflation may even go down."  This seems counterintuitive. Could you please explain this? Or perhaps you mean that because productivity increased the price of goods can even go down?
Jason
CC BY-SA 3.0
2017-08-09T10:51:42.013Z
Exactly. In a competitive labor market model, workers earn their marginal product and all markets clear, so a productivity shock will translate into higher wages, higher consumption, and no change in prices. In a basic New Keynesian model, a transitory productivity shock will translate into higher wages, lower inflation, and more consumption.
Tobias
CC BY-SA 3.0
2017-08-09T10:56:26.507Z
Thanks, one last question: In the real world we would also count imports as impacting inflation too, correct?
Jason
CC BY-SA 3.0
2017-08-09T10:03:08.407Z
2017-08-09T10:03:08.407Z
Tobias
<p>If we assume a country where only <strong>demand pull</strong> inflation holds, that is no imports cost inflation or currency fluctuations are a risk, then we can assume that inflation is determined by:</p>

<ol>
<li><p>Consumer spending (for example for the US this should be the most important part of the economy)</p></li>
<li><p>Government spending</p></li>
</ol>

<p>Are retail sales and house sales included in the consumer spending figure?</p>

<p>Aside from that, are there other economic indicators (that are neither consumer spending nor government spending) that influence a country's inflation?</p>

CC BY-SA 3.0
2017-08-08T19:56:56.103Z
Demand/expenditure usually also includes capital formation (investment) and exports
Henry
CC BY-SA 3.0
2017-08-09T07:47:09.217Z
@HenryBy investment you mean business investment?
Jason
CC BY-SA 3.0
2017-08-09T07:51:35.753Z
I mean [fixed capital formation](https://en.wikipedia.org/wiki/Gross_fixed_capital_formation) plus changes in stocks.  It can be done by business or government or consumers and includes things like constructing a new building
Henry
CC BY-SA 3.0
2017-08-09T08:16:31.357Z
But does fixed capital formation actually effect the basket of goods that the CPI comprises?
Jason
<macroeconomics><inflation><currency>
What are the constituents of a country's inflation
Jason
# What are the constituents of a country's inflation

(Asked by: username_0 on 2017-08-08)

If we assume a country where only **demand pull** inflation holds, that is no imports cost inflation or currency fluctuations are a risk, then we can assume that inflation is determined by:

1. Consumer spending (for example for the US this should be the most important part of the economy)
2. Government spending

Are retail sales and house sales included in the consumer spending figure?

Aside from that, are there other economic indicators (that are neither consumer spending nor government spending) that influence a country's inflation?

**Tags:** macroeconomics, inflation, currency
> **Comments:**
> **username_1**: Demand/expenditure usually also includes capital formation (investment) and exports  
> **username_0**: @HenryBy investment you mean business investment?  
> **username_1**: I mean [fixed capital formation](https://en.wikipedia.org/wiki/Gross_fixed_capital_formation) plus changes in stocks.  It can be done by business or government or consumers and includes things like constructing a new building  
> **username_0**: But does fixed capital formation actually effect the basket of goods that the CPI comprises?  

---

## 1 answers

### Answer by username_2 on 2017-08-09. Score: 1 | Accepted answer

The components of aggregate demand are government consumption, consumption, investment, net exports.

While people typically assume there is a relationship between demand shocks and inflation, this does not mean that inflation will necessarily go up whenever consumption goes up, because consumption depends not only on demand shocks but also many other things that will not necessarily affect inflation in the same way. For example, if consumption goes up because labor productivity and incomes increase, inflation may even go down. On the other hand, if the central bank decreases the interest rate, demand will increase and this will cause an increase in inflation.

> **Comments:**
> **username_0**: "For example, if consumption goes up because labor productivity and incomes increase, inflation may even go down."  This seems counterintuitive. Could you please explain this? Or perhaps you mean that because productivity increased the price of goods can even go down?  
> **username_2**: Exactly. In a competitive labor market model, workers earn their marginal product and all markets clear, so a productivity shock will translate into higher wages, higher consumption, and no change in prices. In a basic New Keynesian model, a transitory productivity shock will translate into higher wages, lower inflation, and more consumption.  
> **username_0**: Thanks, one last question: In the real world we would also count imports as impacting inflation too, correct?  

---

