The rate at which price of the representative basket of goods and services is rising over time.
Deflation
Refer to negative inflation that the rate at which price of the representative basket is falling.
Stagflation
High inflation plus low real GDP growth
Consumer Price Index (CPI)
To track the price of a representative basket of goods and services. Calculate as:
Inflation = (Current level of CPI - Previous level of CPI) / Previous level of CPI
CPI Bias
- Quality adjustments - some price increases may reflect quality adjustments that are still counted entirely as inflation.
- New goods – new goods may be introduced that will be hard to compare to older substitutes.
- Substitution – if the price goes up for one good, consumers may substitute another good The CPI surveys do not check to see if consumers are substituting discount or outlet stores. Example is beef vs. pork.
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