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calculation methods of Inflation

calculation methods of Inflation

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Published by nitin garg
calculation methods of Inflation
calculation methods of Inflation

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Published by: nitin garg on Jul 04, 2010
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The term "inflation" usually refers to a measured rise in a broad price index thatrepresents the overall level of prices in goods and services in the economy. TheConsumer Price Index (CPI), the Personal Consumption Expenditures PriceIndex (PCEPI) and the GDP deflator are some examples of broad price indices.The term inflation may also be used to describe the rising level of prices in anarrow set of assets, goods or services within the economy, such as commodities(which include food, fuel, metals), financial assets (such as stocks, bonds and realestate), and services (such as entertainment and health care). The Reuters-CRBIndex (CCI), the Producer Price Index, and Employment Cost Index (ECI) areexamples of narrow price indices used to measure price inflation in particular sectors of the economy. Asset price inflation is a rise in the price of assets, asopposed to goods and services. Core inflation is a measure of price fluctuations ina sub-set of the broad price index which excludes food and energy prices. TheFederal Reserve Board uses the core inflation rate to measure overall inflation,eliminating food and energy prices to mitigate against short term pricefluctuations that could distort estimates of future long term inflation trends in thegeneral economy.
Inflation originally referred to the debasement of the currency. When gold wasused as currency, gold coins could be collected by the government, melted down,mixed with other metals such as silver, copper or lead, and reissued at the samenominal value. By diluting the gold with other metals, the government couldincrease the total number of coins issued without also needing to increase theamount of gold used to make them. When the cost of each coin is lowered in thisway, the government profits from an increase in seignior age. This practice wouldincrease the money supply but at the same time lower the relative value of eachcoin. As the relative value of the coins decrease, consumers would need morecoins to exchange for the same goods and services. These goods and serviceswould experience a price increase as the value of each coin is reduced.By the nineteenth century, economists categorized three separate factors thatcause a rise or fall in the price of goods: a change in the
or resource costs of the good, a change in the
 price of money
which then was usually a fluctuation inmetallic content in the currency, and
currency depreciation
resulting from anincreased supply of currency relative to the quantity of redeemable metal backingthe currency. Following the proliferation of private bank note currency printedduring the American Civil War, the term "inflation" started to appear as a directreference to the
currency depreciation
that occurred as the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency,and not to a rise in the price of goods.
Inflation is usually estimated by calculating the inflation rate of a price index,usually the Consumer Price Index.The Consumer Price Index measures prices of 
a selection of goods and services purchased by a "typical consumer". Theinflation rate is the percentage rate of change of a price index over time.For instance, in January 2007, the U.S. Consumer Price Index was 202.416, andin January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 isThe resulting inflation rate for the CPI in this one year period is 4.28%, meaningthe general level of prices for typical U.S. consumers rose by approximately four  percent in 2007.Other widely used price indices for calculating price inflation include thefollowing:
Cost-of-living indices
(COLI) are indices similar to the CPI whichare often used to adjust fixed incomes and contractual incomes tomaintain the real value of those incomes.
Producer price indices
(PPIs) which measures average changes in prices received by domestic producers for their output. This differsfrom the CPI in that price subsidization, profits, and taxes may causethe amount received by the producer to differ from what the consumer  paid. There is also typically a delay between an increase in the PPI andany eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This

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