GAUGING INFLATION

In the United States, the inflation rate was 0.2% through the 12 months ended July. In the United Kingdom, inflation was 0.1% in July.

How is inflation measured? What are the metrics used in gauging inflation?

Inflation is generally gauged in terms of a consumer price index. Hence, investors follow CPIs more than the Producer Price Index. Statistical agencies, not central banks, measure inflation. Most inflation figures are gathered from surveys. Prices of tens of thousands of goods are recorded and placed into a market basket. The cost of the said basket is compared over time, resulting in a price index.

Price index pertains to the cost of the present market basket, expressed as a percentage of the cost of the identical basket in the starting year. In essence, it is a measure of relative price changes. This was first used to determine the cost of living in order to figure out the wage hikes necessary to maintain a particular standard of living.

In America, the Bureau of Labor Statistics uses two main price indices to gauge inflation.

• Consumer Price Index - An index assessing price changes in consumer goods and services from the buyer’s point of view. CPI is computed by averaging the price changes for each item in the preset basket of goods, such as food, medical care, and transportation.
• Producer Price Index - From a seller’s vantage point, the index evaluates the average change in selling prices by local producers of goods and services over time. PPI looks at three production areas: commodity-based, industry-based, and stage-of-processing-based companies.

Like what we have mentioned before, price indexes are sizable surveys. The federal agency contacts thousands of retail stores, service establishments, rental units and doctors’ offices to get price information on several items used to trail price changes in the CPI. Prices of approximately 80,000 items are recorded monthly, representing a selected sample of the prices paid by consumers for the products and services bought.