Price Level

DEFINITION of 'Price Level'

The average of current prices across the entire spectrum of goods and services produced in the economy. In a more general sense, price level refers to any static picture of the price of a given good, service or tradable security. Price levels may be given in small ranges, such as with securities prices or presented as a discrete value.

The most common price level index is the Consumer Price Index (CPI).

BREAKING DOWN 'Price Level'

The price level is usually examined through a "basket of goods" approach, in which a collection of consumer-based goods and services are examined in aggregate; changes in the aggregate price over time will push the index measuring the basket of goods higher. Weighted averages are typically used rather than geometric means.

Price levels provide a snapshot of prices at a given time, making it possible to review changes in the broad price level over time. As prices rise (inflation), or fall (deflation), consumer demand for goods is also affected, which leads broad production measures like gross domestic product (GDP) higher or lower.

Price levels are one of the most watched economic indicators in the world; it is widely believed that prices should stay relatively stable from year to year so as not to cause undue inflation (rising prices). If price levels begin to rise too quickly, central bankers or governments will look to decrease the money supply or otherwise decrease the aggregate demand for goods and services.

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