What is a Price Level
A price level is 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 expressed in small ranges, such as ticks with securities prices, or presented as a discrete value.
BREAKING DOWN Price Level
There are two meanings of the term price level in the world of business. One meaning refers to the price of assets traded on the market. The other meaning refers to the price of goods and services and is used in reference to inflation.
Price Level for Traders and Investors
Traders and investors make money by buying and selling securities. Some securities are traded and followed by a large number of people that buy when the price of the security reaches a certain price level and sell when it reaches a certain price level. These price levels are referred to as support and resistance. Traders uses these areas of support and resistance to define entry points and exit points.
Support is a price level where a downtrend can be expected to pause due to a concentration of demand. As the price of a security drops, demand for the shares increases, thus forming the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.
Once an area or zone of support or resistance has been identified, it provides valuable potential trade entry or exit points. This is because, as a price reaches a point of support or resistance, it will do one of two things – bounce back away from the support or resistance level, or violate the price level and continue in its direction – until it hits the next support or resistance level.
Price Level for Economists
When economists refer to price level, it is in reference to the buying power of money or inflation. In other words, economists are describing the state of the economy by looking at how much people can buy with the same dollar of currency. The most common price level index is the Consumer Price Index (CPI).
The price level is examined through a "basket of goods" approach, in which a collection of consumer-based goods and services is examined in aggregate; changes in the aggregate price over time 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, such as 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 look for ways to decrease the money supply or the aggregate demand for goods and services.