Inflation rate
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In economics, the inflation rate is a measure of inflation, or the rate of increase of a price index such as the consumer price index. It is the percentage rate of change in price level over time, usually one year.[1] The rate of decrease in the purchasing power of money is approximately equal.
The inflation rate is used to calculate the real interest rate, as well as real increases in wages. Official measurements of this rate are input variables to COLA adjustments and inflation derivatives prices.
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[edit] 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 terms, removing systematic quarter-to-quarter variation.
[edit] Definitions
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:
After the year the purchasing power 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 log P0 − 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 − 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.
[edit] See also
- Consumer price index
- List of countries by inflation rate
- Measures of inflation
- Units of inflation
- Deflation
- Hyperinflation
- Inflationism
[edit] References
- ^ Sullivan, arthura; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 340. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
[edit] 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.
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