Editing Inflation (section)

== Measures ==
{{see also|Consumer price index}}
[[File:Inflation data.webp|thumb|upright=2.6|right|[[producer price index|PPI]] is a [[leading indicator]], CPI and PCE [[Latency (engineering)|lag]]<ref>{{cite web | url=https://www.yahoo.com/now/does-producer-price-index-tell-190327824.html | title=What Does the Producer Price Index Tell You? | date=June 3, 2021 | access-date=October 1, 2022 | archive-date=December 25, 2021 | archive-url=https://web.archive.org/web/20211225183858/https://www.yahoo.com/now/does-producer-price-index-tell-190327824.html | url-status=live }}</ref>
{{legend-line|#00A2FF solid 3px|[[producer price index|PPI]]}}
{{legend-line|#61D836 solid 3px|Core PPI}}
{{legend-line|#929292 solid 3px|[[Consumer price index|CPI]]}}
{{legend-line|#F8BA00 solid 3px|[[Core inflation|Core]] CPI}}
{{legend-line|#FF2600 solid 3px|[[Personal consumption expenditures price index|PCE]]}}
{{legend-line|#D41876 solid 3px|Core PCE}}]]
Given that there are many possible measures of the price level, there are many possible measures of price inflation. Most frequently, the term "inflation" refers to a rise in a broad price index representing the overall price level for goods and services in the economy. The [[consumer price index]] (CPI), the [[personal consumption expenditures price index]] (PCEPI) and the [[GDP deflator]] are some examples of broad price indices. However, "inflation" may also be used to describe a rising price level within a narrower set of assets, goods or services within the economy, such as [[commodity|commodities]] (including food, fuel, metals), [[tangible asset]]s (such as real estate), services (such as entertainment and health care), or [[Labour (economics)|labor]]. Although the values of capital assets are often casually said to "inflate," this should not be confused with inflation as a defined term; a more accurate description for an increase in the value of a capital asset is appreciation. The FBI (CCI), the [[producer price index]], and [[employment cost index]] (ECI) are examples of narrow price indices used to measure price inflation in particular sectors of the economy. [[Core inflation]] is a measure of inflation for a subset of consumer prices that excludes food and energy prices, which rise and fall more than other prices in the short term. The [[Federal Reserve Board]] pays particular attention to the core inflation rate to get a better estimate of long-term future inflation trends overall.<ref>{{Cite web|last=Kiley |first=Michael J. |title=Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices |series=Finance and Economic Discussion Series |publisher=Federal Reserve Board |date=July 2008|url=http://www.federalreserve.gov/pubs/feds/2008/200838/200838pap.pdf |archive-url=https://ghostarchive.org/archive/20221009/http://www.federalreserve.gov/pubs/feds/2008/200838/200838pap.pdf |archive-date=2022-10-09 |url-status=live|access-date= May 13, 2015 }}</ref>

The inflation rate is most widely calculated by determining the movement or change in a price index, typically the [[consumer price index]].<ref>''See:''
* {{harvnb|Hall|Taylor|1993}};
* {{harvnb|Blanchard|2021}};
The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer".</ref>  

The inflation rate is the percentage change of a price index over time. The [[Retail Prices Index]] is also a measure of inflation that is commonly used in the United Kingdom. It is broader than the CPI and contains a larger basket of goods and services. Inflation is politically driven, and policy can directly influence the trend of inflation.

The RPI is indicative of the experiences of a wide range of household types, particularly low-income households.<ref>{{Cite journal |last1=Carruthers |first1=A. G. |last2=Sellwood |first2=D. J. |last3=Ward |first3=P. W. |date=1980 |title=Recent Developments in the Retail Prices Index |url=https://www.jstor.org/stable/2987492 |journal=Journal of the Royal Statistical Society. Series D (The Statistician) |volume=29 |issue=1 |pages=1–32 |doi=10.2307/2987492 |jstor=2987492 |issn=0039-0526 |access-date=June 9, 2022 |archive-date=June 9, 2022 |archive-url=https://web.archive.org/web/20220609045128/https://www.jstor.org/stable/2987492 |url-status=live |url-access=subscription }}</ref>

To illustrate the method of calculation, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of the year is: <math>\left(\frac{211.080-202.416}{202.416}\right)\times100\%=4.28\%</math>

The resulting inflation rate for the CPI in this one-year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007.<ref>The numbers reported here refer to the US Consumer Price Index for All Urban Consumers, All Items, series CPIAUCNS, from base level 100 in base year 1982. They were downloaded from the FRED database at the [[Federal Reserve Bank of St. Louis]] on August 8, 2008.</ref>

Other widely used price indices for calculating price inflation include the following:
* '''[[Producer price index|Producer price indices]]''' (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the [[Wholesale price index]].
* '''[[Commodity price index|Commodity price indices]]''', which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.
* '''[[Core inflation|Core price indices]]''': because food and oil prices can change quickly due to changes in [[supply and demand]] conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore, most [[List of national and international statistical services|statistical agencies]] also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, [[central bank]]s rely on it to better measure the inflationary effect of current [[monetary policy]].

Other common measures of inflation are:
* '''[[GDP deflator]]''' is a measure of the price of all the goods and services included in gross domestic product (GDP). The [[US Commerce Department]] publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.

∴ <math>\mbox{GDP Deflator} = \frac{\mbox{Nominal GDP}}{\mbox{Real GDP}}</math>
* '''Regional inflation''' The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
* '''Historical inflation''' Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology.
* '''[[Asset price inflation]]''' is an undue increase in the prices of real assets, such as real estate.
In some cases, the measures are meant to be more humorous or to reflect a single place. This includes:

* The [[Christmas Price Index]], which calculates the cost of the items mentioned in a song, "[[The Twelve Days of Christmas (song)|The Twelve Days of Christmas"]].<ref>{{Cite news |last=Olson |first=Elizabeth |date=December 20, 2007 |title=The '12 Days' Index Shows a Record Increase |url=https://www.nytimes.com/2003/12/25/business/the-12-days-index-shows-a-record-increase-704075.html?n=Top%2FReference%2FTimes+Topics%2FSubjects%2FG%2FGifts |work=[[The New York Times]]}}</ref>
* The [[Big Mac Index]], which compares prices across countries.<ref>{{cite news |date=9 April 1998 |title=Big MacCurrencies |url=http://www.economist.com/node/159859 |url-status=live |archive-url=https://web.archive.org/web/20171227100228/http://www.economist.com/node/159859 |archive-date=27 December 2017 |access-date=27 November 2013 |newspaper=The Economist}}</ref>
* The [[Jollof index]], which calculates the price of food needed to make a [[Jollof rice]], a popular African dish.<ref>{{Cite web |last=Erezi |first=Dennis |date=2022-04-28 |title=Jollof Index, Chicken Republic, inflation and changing food consumption patterns |url=https://guardian.ng/features/jollof-index-chicken-republic-inflation-and-changing-food-consumption-patterns/ |access-date=2024-05-15 |website=The Guardian Nigeria News - Nigeria and World News |language=en-US}}</ref>
* The [[Two Dishes One Soup Index]], which calculates the price of food needed to cook one soup and two other dishes for a small family in Hong Kong.
* The [[Herengracht index]], which calculates the price of housing in a fashionable neighborhood of [[Amsterdam]].<ref>{{Cite journal |last=Eichholtz |first=Piet M. A. |date=1996 |title=A Long Run House Price Index: The Herengracht Index, 1628-1973 |url=http://www.ssrn.com/abstract=598 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.598 |issn=1556-5068|url-access=subscription }}</ref>
* The [[Lipstick index]], which claimed that when the economy got worse, small luxury sales, such as [[lipstick]], would go up.<ref>{{Cite news |date=23 January 2009 |title=Lip service: What lipstick sales tell you about the economy |url=https://www.economist.com/unknown/2009/01/23/lip-service |access-date=2024-06-10 |newspaper=The Economist |issn=0013-0613}}</ref>

=== Issues in measuring ===

Measuring inflation in an economy requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance. For example, if the price of a can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price difference represents inflation. This single price change would not, however, represent general inflation in an overall economy. Overall inflation is measured as the price change of a large "basket" of representative goods and services. This is the purpose of a [[price index]], which is the combined price of a "basket" of many goods and services. The combined price is the sum of the weighted prices of items in the "basket". A weighted price is calculated by multiplying the [[unit price]] of an item by the number of that item the average consumer purchases. Weighted pricing is necessary to measure the effect of individual unit price changes on the economy's overall inflation. The [[consumer price index]], for example, uses data collected by surveying households to determine what proportion of the typical consumer's overall spending is spent on specific goods and services, and weights the average prices of those items accordingly. Those weighted average prices are combined to calculate the overall price. To better relate price changes over time, indexes typically choose a "base year" price and assign it a value of 100. Index prices in subsequent years are then expressed in relation to the base year price.<ref name=Taylor>{{cite book |last=Taylor |first=Timothy |title=Principles of Economics |publisher=Freeload Press |date=2008 |isbn=978-1-930789-05-0}}</ref> While comparing inflation measures for various periods one has to take into consideration the [[Base effect (inflation)|base effect]] as well.

Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods and services from the present are compared with goods and services from the past. Basket weights are updated regularly, usually every year, to adapt to changes in consumer behavior. Sudden changes in consumer behavior can still introduce a weighting bias in inflation measurement. For example, during the COVID-19 pandemic it has been shown that the basket of goods and services was no longer representative of consumption during the crisis, as numerous goods and services could no longer be consumed due to government containment measures ("lock-downs").<ref>{{cite journal |last1=Benchimol |first1=Jonathan |last2=Caspi |first2=Itamar |last3=Levin |first3=Yuval |date=2022 |title=The COVID-19 Inflation Weighting in Israel |journal=The Economists' Voice |volume=19 |issue=1 |pages=5–14 |doi=10.1515/ev-2021-0023 |s2cid=245497122 |doi-access=free }}</ref><ref>{{Cite journal|last=Seiler|first=Pascal|date=2020-09-16|title=Weighting bias and inflation in the time of COVID-19: evidence from Swiss transaction data|journal=[[Swiss Journal of Economics and Statistics]]|volume=156|issue=1|pages=13|doi=10.1186/s41937-020-00057-7|issn=2235-6282|pmc=7493696|pmid=32959014 |doi-access=free }}</ref>

Over time, adjustments are also made to the type of goods and services selected to reflect changes in the sorts of goods and services purchased by 'typical consumers'. New products may be introduced, older products disappear, the quality of existing products may change, and consumer preferences can shift. Different segments of the population may naturally consume different "baskets" of goods and services and may even experience different inflation rates. It is argued that companies have put more innovation into bringing down prices for wealthy families than for poor families.<ref>{{cite news |last1=Botella |first1=Elena |title=That "Inflation Inequality" Report Has a Major Problem |url=https://slate.com/business/2019/11/inflation-inequality-not-about-beer-lettuce.html |access-date=11 November 2019 |work=[[Slate (magazine)|Slate]] |date=8 November 2019 |archive-date=November 30, 2021 |archive-url=https://web.archive.org/web/20211130071656/https://slate.com/business/2019/11/inflation-inequality-not-about-beer-lettuce.html |url-status=live }}</ref>

Inflation numbers are often [[seasonally adjusted]] to differentiate expected cyclical cost shifts. For example, home heating costs are expected to rise in colder months, and seasonal adjustments are often used when measuring inflation to compensate for cyclical energy or fuel demand spikes. Inflation numbers may be averaged or otherwise subjected to statistical techniques to remove [[statistical noise]] and [[Volatility (finance)|volatility]] of individual prices.<ref>{{cite journal |last1=Vavra |first1=Joseph |date=2014 |title=Inflation Dynamics and Time-Varying Volatility: New Evidence and an SS Interpretation |url=https://academic.oup.com/qje/article-abstract/129/1/215/1897034 |journal=The Quarterly Journal of Economics |volume=129 |issue=1 |pages=215–258 |doi= 10.1093/qje/qjt027 |access-date=2023-03-22}}</ref><ref>{{Cite journal |last=Arlt |first=Josef |date=11 March 2021 |title=The problem of annual inflation rate indicator |url=https://onlinelibrary.wiley.com/doi/full/10.1002/ijfe.2563 |journal=International Journal of Finance & Economics |volume=28 |issue=3 |pages=2772–2788|doi=10.1002/ijfe.2563 |s2cid=233675877 |url-access=subscription }}</ref>

When looking at inflation, economic institutions may focus only on certain kinds of prices, or ''special indices'', such as the [[core inflation]] index which is used by central banks to formulate [[monetary policy]].<ref>{{Cite web|url=https://www.investopedia.com/terms/c/coreinflation.asp|title=Why Core Inflation is Important|last=Kenton|first=Will|website=Investopedia|language=en|access-date=2020-01-17|archive-date=December 14, 2021|archive-url=https://web.archive.org/web/20211214063705/https://www.investopedia.com/terms/c/coreinflation.asp|url-status=live}}</ref>

Most inflation indices are calculated from weighted averages of selected price changes. This necessarily introduces distortion, and can lead to legitimate disputes about what the true inflation rate is. This problem can be overcome by including all available price changes in the calculation, and then choosing the [[median]] value.<ref>{{cite web |url=http://www.clevelandfed.org/Research/commentary/1991/1201.pdf |title=Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation |access-date=May 21, 2011 |url-status=dead |archive-url=https://web.archive.org/web/20110515145028/http://www.clevelandfed.org/Research/commentary/1991/1201.pdf |archive-date=May 15, 2011 |df=mdy-all }}</ref> In some other cases, governments may intentionally report false inflation rates; for instance, during the presidency of [[Cristina Kirchner]] (2007–2015) the [[government of Argentina]] was criticised for manipulating economic data, such as inflation and GDP figures, for political gain and to reduce payments on its inflation-indexed debt.<ref>{{cite news |url=https://www.reuters.com/article/us-imf-argentina-idUSBRE91019920130202 |title=IMF reprimands Argentina for inaccurate economic data |newspaper=Reuters |date=February 2, 2013 |access-date=February 2, 2013 |last1=Wroughton |first1=Lesley |archive-date=August 4, 2021 |archive-url=https://web.archive.org/web/20210804134926/https://www.reuters.com/article/us-imf-argentina-idUSBRE91019920130202 |url-status=live }}</ref><ref>{{cite news |url=https://www.bloomberg.com/news/2013-02-01/argentina-becomes-first-nation-censured-by-imf-on-inflation-data.html |title=Argentina Becomes First Nation Censured by IMF on Economic Data |newspaper=Bloomberg.com |date=February 2, 2013 |access-date=February 2, 2013 |archive-date=March 10, 2021 |archive-url=https://web.archive.org/web/20210310235820/http://www.bloomberg.com/news/2013-02-01/argentina-becomes-first-nation-censured-by-imf-on-inflation-data.html |url-status=live }}</ref>

=== Official vs. true vs. perceived inflation ===
The true inflation is one percentage point lower than the official one, according to research. Therefore, the 2% inflation target is needed to prevent the true inflation being close to zero or even deflation. The reasons are the following:<ref>{{cite web|url=https://cals.ncsu.edu/news/you-decide-why-stop-at-an-inflation-rate-of-2/|title=You Decide: Why Stop at an Inflation Rate Target of 2%?|date=January 29, 2023|website=CALS News|publisher=NC State University}}</ref>
* '''Substitution effect''': People buy fewer products with the highest price rises and more of those whose prices have risen less. Therefore, the price of their non-fixed shopping basket rises less than that of a fixed shopping basket.
* '''Unobserved quality improvements''': Even though statisticians try to take quality improvements into account, they are not able to do it fully. This is why people rather buy current products at the higher prices than old products at their old prices.
* '''New goods''': The current shopping basket is much better, because it has goods that you previously could not even dream of.<ref>{{cite web|url=https://www.dummies.com/article/business-careers-money/business/economics/inflation-usually-overestimated-228118/|title=Why Inflation Is Usually Overestimated|author=Dan Richards|author2=Manzur Rashid|author3=Peter Antonioni|date=November 1, 2016|publisher=John Wiley & Sons}}</ref>

Nevertheless, people overestimate the inflation even vs. the measured inflation. This is because they focus more on commonly-bought items than on durable goods, and more on price increases than on price decreases.<ref name=StatisticsCanada>{{cite web|date=January 19, 2022 |publisher=Statistics Canada |title=The naked eye versus the CPI: How does our perception of inflation stack up against the data? |url=https://www.statcan.gc.ca/o1/en/plus/256-naked-eye-versus-cpi-how-does-our-perception-inflation-stack-against-data}}<!-- auto-translated from Finnish by Module:CS1 translator --></ref> On the other hand, different people have different shopping baskets and hence face different inflation rates.<ref name=StatisticsCanada/>

[[Cumulative process|Cumulative]] inflation due to the [[compound interest|compound effect]] can impact the perception of inflation.<ref name="n873">{{cite journal | last=McGranahan | first=Leslie | last2=Paulson | first2=Anna L. | title=The Incidence of Inflation: Inflation Experiences by Demographic Group: 1981-2004 | journal=FRB of Chicago Working Paper | date=2005 | url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3887185 | access-date=23 April 2025}}</ref>

===Inflation expectations===

Inflation expectations or expected inflation is the rate of inflation that is anticipated for some time in the foreseeable future. There are two major approaches to modeling the formation of inflation expectations. [[Adaptive expectations]] models them as a weighted average of what was expected one period earlier and the actual rate of inflation that most recently occurred. [[Rational expectations]] models them as unbiased, in the sense that the expected inflation rate is not systematically above or systematically below the inflation rate that actually occurs.

A long-standing survey of inflation expectations is the University of Michigan survey.<ref>{{cite web|url=https://fred.stlouisfed.org/series/MICH|title=University of Michigan: Inflation Expectation|date=January 1978|publisher=Economic Research, Federal Reserve Bank of St. Louis|access-date=March 9, 2017|archive-date=November 7, 2021|archive-url=https://web.archive.org/web/20211107075130/https://fred.stlouisfed.org/series/MICH|url-status=live}}</ref>

Inflation expectations affect the economy in several ways. They are more or less built into [[nominal interest rate]]s, so that a rise (or fall) in the expected inflation rate will typically result in a rise (or fall) in nominal interest rates, giving a smaller effect if any on [[real interest rate]]s. In addition, higher expected inflation tends to be built into the rate of wage increases, giving a smaller effect if any on the changes in [[real wages]]. Moreover, the response of inflationary expectations to monetary policy can influence the division of the effects of policy between inflation and unemployment (see [[monetary policy credibility]]).