Inflation rate

In economics, the inflation rate is a measure of inflation, the rate of increase of a price index (for example, a consumer price index). The rate of decrease in the purchasing power of money is approximately equal.

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.

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).