Inflation - Notes

Inflation (N)
Inflation is a sustained rise in the general price level over a given time period or alternatively a decrease in the value of money.

Ways to measure inflation:
• Retail Price Index (R.P.I.) or Consumer Price Index (C.P.I.)

    • Consumer Price Index (CPI) is a   measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser.
    • Producer Price Indexes (PPI) is a family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.
How does this work ?
        1. Choose a “basket” of about 650 goods & services. Those most used by the average household.
        2. The items are differently weighted depending on their demand.
        3. Items are representative of the average consumption bundle
        4. Bundle must be contemporary (updated every 5 years maximum)

  Choose A Base Year:
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      How is ‘N’ expressed?
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        a. Year on year:

        b. Measuring ‘N’ over longer periods of time:
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        c. Measuring ‘N’ on a monthly basis (usually if hyperinflation is present)
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Problems with measuring inflation

There are a number of problems with measuring inflation   which may lead to error in the measurement of inflation (usually overestimation):

        1) Quality bias : The measurement does not take into account changes , usually improvements, in   the quality of products just changes in prices. So inflation may be overestimated (i.e. a product may be twice as expensive but last 5 times longer).
        2) Substitution bias: As prices goes up consumers may substitute some products for other products (especially... [continues]

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