Inflation, the rate at which the general level of prices for goods and services is rising, is tracked using various methods, with the most common being through the calculation of price indices. Here we consider the question – how is inflation tracked?
Consumer Price Index (CPI)
The CPI is one of the most widely used measures of inflation. It tracks changes in the prices of a basket of goods and services that are typically purchased by households. The basket includes items such as food, housing, transportation, healthcare, and education. Government statistical agencies regularly collect price data for these items from urban and rural areas, and then calculate the CPI based on the average of these prices. They may then share such data, and use it for greater understanding.
How is Inflation Tracked? Producer Price Index (PPI)
The PPI measures changes in the prices domestic producers receive for their goods and services. It tracks prices at various stages of production, from raw materials to finished goods. The PPI is useful for analyzing inflationary pressures within the production process. Also, it can provide insights into future changes in consumer prices.
GDP Deflator
The GDP deflator is a broad measure of inflation that reflects changes in the overall price level of goods and services included in gross domestic product (GDP). It compares the current value of GDP to the value of GDP in a base year, adjusting for changes in prices over time. The GDP deflator is a method many utilise to estimate real GDP, which accounts for inflation and allows for comparisons of economic output over time.
Personal Consumption Expenditures (PCE) Price Index
The PCE price index is another measure of inflation that tracks changes in the prices of goods and services that households purchase. It is similar to the CPI but uses a different methodology for calculating price changes. The Federal Reserve often monitors the PCE price index as a key indicator of inflationary trends.
Cost of Living Indexes
Cost of living indexes measure changes in the cost of maintaining a certain standard of living over time. These indexes take into account factors such as housing costs, utilities, transportation, and healthcare expenses. Institutions may use such an index to adjust wages, pensions, and other payments for inflation.
Asset Price Inflation
In addition to tracking changes in the prices of goods and services, inflation can also manifest in asset prices such as stocks, bonds, real estate, and commodities. Central banks and financial institutions monitor asset price inflation. They do this as part of their efforts to maintain financial stability.
Conclusions
Overall, institutions and governments use a a combination of these measures to track inflation. Each provides different insights into the dynamics of price changes in the economy. These indicators help policymakers, businesses, investors, and consumers make informed decisions about monetary policy, investment strategies, and personal finances.
