In economics, the inflation rate is a measure of inflation, the rate of increase of a price index (usually some form of consumer price index). Equivalently, the rate of decrease in the purchasing power of money.

It's used to calculate the real interest rate, as well as real increases in wages, and official measurements of this rate act as input variables to COLA adjustments and Inflation derivatives prices.

Description of the rate

The rate is usually expressed in annualized terms, though the measurement periods are usually different from one year. Inflation rates are often given in seasonally adjusted terms, removing systematic quarter-to-quarter variation.

Measurement

Main article: price index

If P₀ is the current average price level and P _{− 1} is the price level a year ago, the rate of inflation during the year might be measured as follows:

There are other ways of calculating the inflation rate, such as logP₀ − logP _{− 1} (using the natural log), again stated as a percentage.

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 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

• econometrics
• interest rate

External links

• Consumer Price Index Home Page Bureau of Labor Statistics, United States Department of Labor.