The difficulty of inflation theory is to explain the fluctuations of the price
level in short-term. First, we use the relationship
between price and money in the traditional quantity equation to derive the
inflation equation that can explain changes of the price level in the long-term
and short-term. Then,
by analyzing the phase diagram of the single variable and the complex variable in the inflation
equation, we find that the fundamental reason of the periodic change of the
short-term price is the periodic change of the real interest rate. Because
fluctuations of the inflation rate and interest rate are the same in
phase, so there is no difference
in the business cycle. Finally, this paper analyzes
the rise and fall of core price under the influence of money and real interest
rate respectively. It lays the foundation for further discussion of the
relationship between inflation and unemployment in Phillips curve.
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