In economics

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, the inflation rate is a measure of inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, the rate of increase of a price index

Price index

A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

 (for example, a consumer price index

Consumer price index

A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...

). It is the percentage rate of change in price level over time. The rate of decrease in the purchasing power

Purchasing power

Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

 of money is approximately equal.

The inflation rate is used to calculate the real interest rate

Real interest rate

The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate...

, as well as real increases in wages. Official measurements of this rate are input variables to COLA adjustments and inflation derivatives

Inflation derivatives

In finance, inflation derivative refers to an over-the-counter and exchange-traded derivative that is used to transfer inflation risk from one counterparty to another...

 prices.

Description of the rate

The rate is usually expressed in annualized terms, though measurement periods are not usually one year. Inflation rates are often given in seasonally adjusted

Seasonal adjustment

Seasonal adjustment is a statistical method for removing the seasonal component of a time series that is used when analyzing non-seasonal trends. It is normal to report un-adjusted data for current unemployment rates, as these reflect the actual current situation...

 terms, removing systematic

Systematic

Systematic is an American hard rock band from Oakland, California. They were one of the first signings to Metallica drummer Lars Ulrich's record label, The Music Company, via Elektra Records. The band released two studio albums before disbanding in 2004....

 quarter-to-quarter variation.

Definitions

If is the current average price level and is the price level a year ago, the rate of inflation during the year might be measured as follows:

After the year the purchasing power

Purchasing power

Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

 of a unit of money is multiplied by a factor 1 / ( 1 + inflation rate ).

There are other ways of defining the inflation rate, such as (using the natural log), again stated as a percentage. In this case after the year the purchasing power of a unit of money is multiplied by a factor .

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

Market basket

The term market basket or commodity bundle refers to a fixed list of items used specifically to track the progress of inflation in an economy or specific market....

 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

• Consumer price index
  Consumer price index
  A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
  
  
• List of countries by inflation rate
• Measures of inflation
• Units of inflation
• Deflation
• Hyperinflation
  Hyperinflation
  In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
  
  
• Inflationism
  Inflationism
  In economics, an inflationist or inflationary economic, fiscal, or monetary policy, is one that is predicted to lead to a substantial level of inflation. Similarly, an inflationist economist is one that advocates an inflationist policy...
  
  

External links

• Consumer Price Index Home Page Bureau of Labor Statistics, United States Department of Labor.
• US Inflation Calculator with Rates US Inflation Calculator and Rate Charts (1913-current).
• Inflation Calculator Bank of England.