Inflation gap

An inflation gap forms when the rate of inflation has remained below the target rate set by a central bank to maintain price stability for an extended period of time. The inflation gap is calculated from the sum of the deviations that have occurred over time with regard to this target rate. Their size indicates the extent of deflationary tendencies in an economy.

An inflation gap in a single economy is important within a monetary union. Because it represents an indicator of a real devaluation of the common currency and can even push its exchange rate down in the long run.

See also "deflation"

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Further explanations for the first letter "I"