inflation rate

In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation), usually some form of consumer price index. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money. This is sometimes expressed as an "annualized" number, even if the period measured is less than a year.

The rate of inflation is a variable used to calculate the real interest rate, as well as real increases in wages. In general inflation rates are calculated so that they can be directly subtracted from some other rate. In general an inflation rate will be stated in seasonally adjusted terms.

If P₀ is the current average price level and P _{- 1} is the price level a year ago, the rate of inflation during the year might be measured as follows:

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There are other ways of calculating the inflation rate, such as logP₀ - logP _{- 1} (using the natural log), again stated as a percentage.

There are two general methods for calculating inflation rates - one is to use a base period, the other is to use "chained" measurements. Chained measurements adjust not only the prices, but the contents of the market basket involved, with each price period. More common, however, is the base period reference. This can be seen from inflation reports from the "relative weight" assigned to each component, and by looking at the technical notes to see what each item in an inflation basket represents and how it is calculated.

See also econometrics, interest rate

External links

• Consumer Price Index Home Page Bureau of Labor Statistics, United States Department of Labor.

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