- Inflation rate
In
economics , the inflation rate is a measure ofinflation , the rate of increase of aprice index (for example, aconsumer price index ). The rate of decrease in thepurchasing power of money is approximately equal.It's used to calculate the
real interest rate , as well as real increases inwages , and official measurements of this rate act as input variables to COLA adjustments andInflation derivatives prices.Description of the rate
The rate is usually expressed in
annual ized terms, though the measurement periods are usually different from one year. Inflation rates are often given in seasonally adjusted terms, removingsystematic quarter-to-quarter variation.Definitions
If P_0 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:
:: ext{inflation rate} = frac{P_0 - P_{-1{P_{-1 imes 100%
After the year the
purchasing power of a unit of money is multiplied by a factor 1 / ( 1 + inflation rate/100 ).There are other ways of defining the inflation rate, such as log P_0 - log P_{-1} (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 e^{- { ext {inflation rate}.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
* Measures of inflation
* Units of inflation
*Econometrics
*Interest rate
*Deflation External links
* [http://www.bls.gov/cpi/ Consumer Price Index Home Page] Bureau of Labor Statistics, United States Department of Labor.
* [http://www.usinflationcalculator.com/ US Inflation Calculator with Rates] US Inflation Calculator and Rate Charts (1913-current).
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