How is Inflation Rate Determined by a Country?

This question was recently posted.

how inflation rate of any country is determined?
i mean which yardstick is used to measure inflation?

looking forward to quick response

thanks in advance

A. By a number of factors really, that’s a pretty open-ended question 😛

Essentially in the US and Canada the CPI index is used to help determine movements in inflation. CPI = consumer price index and measures the ‘cost’ of select goods. Generally, everything is included in the CPI index. However, there are other things that can influence inflation (which [inflation] is a measure of price movements of goods).

I.E. you may watch the housing market to get an indication of inflation…. high gas prices may be an indication that inflation (the overall cost of goods) will increase.

3 thoughts on “How is Inflation Rate Determined by a Country?

  1. Dev

    A slight twist to OP’s question but I don’t think it qualifies as a hijack…

    I’ve heard about how the CPI overstates inflation. Assume an economy comprised of hot dogs and hamburgers, where each costs 1 unit and households consume 5 hot dogs and 5 hamburgers per unit of time.

    Suddenly, the cost of hot dogs doubles. In response, households now consume 3 hot dogs and 7 hamburgers. The CPI shows a 50% inflation rate, but (the argument goes) since expenditures rose from 10 units to 13 units, the “real” rate is only 30%.

    It seems to me the inflation rate must be somewhere in the middle. Here’s why:

    Households would obviously prefer to eat more hot dogs that they do at present; the reduction is a concession to price. Thus, it would be reasonable to expect a reduction in net utility such that they are spending 30% more for less utility. I’m not smart enough to figure out where the “correct” rate lies, but it would seem that 30% < "true" inflation < 50%.

    Comments?

  2. barry econ

    Well I know your example is simple, but CPI wouldn’t go up by 50% 😛 I suppose in a market with just those two items it would, but quite frankly, no market operates like that. It bring sup the question though about real vs. nominal values.

    CPI isn’t actually a value, it’s a measurement, and index, not a percentage or something like that.

    Having said that, you can calculate real values with CPI, however, overstatement I’m sure is accounted for, or at least acknowledged.

  3. EliteSigs

    The CPI is a mere estimate of what inflation may be. However, given the questionable nature of CPI’s resilience to mistating actual levels of inflation by employing a fixed basket of goods, etc., it may be best to look at multiple indicators.

    It is best if you look at a combination of variables. Lets say to gain an exceptional grasp on price levels, you might look at not only the CPI, but the GDP deflator, money balances, and also inflation expectations (generally a key determinate to the direction of actual inflation).

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