Inflation: How Is It Measured?
  1. Inflation: Introduction
  2. Inflation: What Is Inflation?
  3. Inflation: How Is It Measured?
  4. Inflation: Inflation And Interest Rates
  5. Inflation: Inflation And Investments
  6. Inflation: Conclusion

Inflation: How Is It Measured?

Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

In North America, there are two main price indexes that measure inflation:

  • Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.
  • Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.

You can think of price indexes as large surveys. Each month, the U.S. Bureau of Labor Statistics contacts thousands of retail stores, service establishments, rental units and doctors' offices to obtain price information on thousands of items used to track and measure price changes in the CPI. They record the prices of about 80,000 items each month, which represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased.

In the long run, the various PPIs and the CPI show a similar rate of inflation. This is not the case in the short run, as PPIs often increase before the CPI. In general, investors follow the CPI more than the PPIs.
Inflation: Inflation And Interest Rates

  1. Inflation: Introduction
  2. Inflation: What Is Inflation?
  3. Inflation: How Is It Measured?
  4. Inflation: Inflation And Interest Rates
  5. Inflation: Inflation And Investments
  6. Inflation: Conclusion
RELATED TERMS
  1. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  2. Market Basket

    A subset of products or securities that is designed to mimic ...
  3. Basket Of Goods

    A relatively fixed set of consumer products and services valued ...
  4. Producer Price Index - PPI

    A family of indexes that measures the average change in selling ...
  5. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
  6. Bureau Of Labor Statistics (BLS)

    A government agency that produces a range of economic data which ...
RELATED FAQS
  1. How does the Bureau of Labor Statistics determine the Consumer Price Index (CPI)?

    Changes in the average price level of more than 200 goods and services across the U.S. economy are used to determine the ... Read Answer >>
  2. Is the consumer price index (CPI) the best measure of inflation?

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  3. Does the consumer price index (CPI) correlate with the change in price of goods and ...

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  4. Will the consumer price index (CPI) be updated or revised in the future?

    Learn about the consumer price index (CPI) and understand how its purpose and calculation make it necessary to continually ... Read Answer >>
  5. What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine ... Read Answer >>
  6. How is the basket of goods selected for the Consumer Price Index?

    Read about alterations in the market basket for the consumer price index, a measure of approximate consumer price changes ... Read Answer >>
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