Editing Inflation (section)

=== 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>