Measurement of inflation and deflation
Economics notes
Measurement of inflation and deflation
Inflation and deflation are measured using various indicators, with the most common being the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI measures changes in the average price level of a basket of goods and services typically consumed by households. The PPI measures changes in the average price level of goods and services at the producer or wholesale level. Other inflation and deflation measures include the GDP deflator, which tracks changes in the average price level of all goods and services in the economy, and core inflation measures, which exclude volatile components, such as food and energy prices, to provide a more stable indicator of underlying inflationary trends. Understanding the measurement of inflation and deflation helps policymakers, businesses, and individuals assess changes in the cost of living, plan for price fluctuations, and make informed economic decisions.
How do we measure inflation and deflation?
Inflation and deflation are measured using price indexes, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI).
What are the limitations of the Consumer Price Index (CPI) as a measure?
Limitations of CPI as a measure include not accounting for changes in quality, substitution effects, and potential biases in the basket of goods and services used for calculation.
How does the Producer Price Index (PPI) relate to inflation?
The Producer Price Index (PPI) measures the average change in prices received by producers, providing insight into inflationary pressures along the supply chain, which can ultimately impact consumer prices.