Inflation Rate, Rate of Inflation
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The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period. The rate of inflation may be calculated weekly, monthly or annually. However, it is always expressed as an annualized figure.
The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period. The rate of inflation may be calculated weekly, monthly or annually. However, it is always expressed as an annualized figure.
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Inflation Rate: Indices
The inflation rate can be calculated for different price indices. For the national inflation rate, the consumer price index (CPI) is considered. This index measures the actual prices of goods and services needed by the common man. The inflation rate can also be measured by the following indices:
- Cost-of-living index (COLI): This is used to adjust income scales so that the real value of earnings remains the same.
- Producer price index (earlier Wholesale Price Index): This measures the average change in prices that domestic producers receive for their products. This index measures the growing pressure on producers due to changes in the costs of their raw materials. This pressure might get passed on to consumers, absorbed by profits or offset by a rise in productivity.
- Commodity price index: This measures the prices of a selected group of commodities.
- Core price index: This removes the volatile components (primarily food and oil) from broader indices, like the CPI. Short term changes in demand and supply conditions do not significantly affect such indices. Central banks use it to assess the need for adjusting the monetary policy.
Methods of Calculating the Inflation Rate
The two main methods used to calculate the inflation rate are:
- Base period: This method is the more common of the two and assigns a relative weight to each element while making calculations.
- Chained measurements: In this method, the contents of the ‘commodity bundle’ are adjusted, along with the prices. Besides, individual time periods in which the price levels fluctuate are also taken into account.
Any undesired change in the rate of inflation can affect the economy and national development at large. The appropriate estimation of inflation rates is necessary to get an overview of the national economy.
Inflation Rate: The Formula
The equation to calculate the inflation rate is:
Inflation Rate = (Po- P-1)* 100 / P-1,
where
Po = the present average price
P-1 = the price that existed last year.
The inflation rate is always stated as a percentage. Another way of calculating the inflation rate is to apply the log rule. The inflation rate is important, since it is subtracted from various economic rates in order to eliminate the impact of inflation. The real increase in wages is also counted by taking into account the prevailing inflation rate.
