Inflation refers to decrease in the purchasing power of money. Alternatively, the increase in the prices of the goods can also be said to be the inflation.
Controlling the inflation has become a major concern for all the economies and thus, it is important to understand the aspects relating inflation. The calculation of the rate of inflation is not as straightforward as does it looks like. In this context, this blog sketches out the crucial aspects that govern the computation of inflation.
Different Aspects Related to Inflation
Basically the measurement of the inflation is made based on the increase in the prices of goods, but which goods are to be considered, remains an issue. The economists need to develop standard criteria to include the type of goods in a basket that would be taken as a base in the computation of the rate of inflation. The inclusion of the goods in the basket needs to be in such a manner that it becomes a representative of the entire economy. The developments in the field of economy have been seen in this regard with the advent of consumer price index (CPI).
Consumer Price Index
The consumer price index is described as the basket of goods representing the entire market of the consumers goods. It is made up of various small baskets of the goods for example, housing, food, transportation, healthcare, clothing, entertainment, and others. The rate of inflation is computed with reference to the increase in the consumer price index from one year to another taking the previous year as the base.
The Bureau of Labor Statistics (BLS) has been established as the independent authority to prescribe the guidelines as regard inclusion and exclusion of the goods in the indices. It is responsible to gather the data relevant for the computation of the rate of inflation and publish that data for use to various stakeholders.
Producer Price Index
Ofcourse there are several other measures used in estimating the rate of inflation, for example, producer price index and GDP inflator. The producer price index represents the increase in the cost of the goods produced in one year as compared to the cost of those goods in the preceding year. Thus, the rate of inflation can also be computed with reference to the increase in the producer price index. Further, the gross domestic product (GDP) indicates the overall health of the economy, thus, it also plays an important role in the computation of the inflation.
Deflation
It is not always necessary that the prices of goods increase each year, there may be seen decreases in the prices of the goods also. This phenomenon is called deflation which is opposite of the inflation. As has already been stated that the inflation decreases the purchasing power of money, thus, the government should strive to control the inflation to maintain or increase the purchase power of its currency. For this purpose, the government has various tools such as adjusting the interest rates, repo rates, reserve requirement, and other regulatory reforms.
Importance of Inflation
This blog highlights the mechanism employed to compute the rate of inflation, measures of the inflation, and other allied aspects governing the macro economic issues. The consumer price index has been considered to be most widely used tool to measure the rate of inflation. The composition of the consumer price index involves Consumer Goods from various sectors such as transportation, food, housing, and health care.
It is very important for the goverment to necessary steps to keep Inflation in check. Inflation as a topic should be understood well by finance & economics students. The students should also know the importance of economics of student life. Only then they will be able to properly handle their life as an economics student.
This blog is written by Bella Williams , who is private tutor in Information Technology at Expert Assignment Help and loves working with students to help them out with IT assignments and software packages for their capstone projects. She breathes and lives around international students and understands their problems. She also conducts educational tours for students during vacation.