How is inflation/deflation calculated?
In: Economics
The agency tracking inflation measure different indexes, the most common one is CPI or consumer price index.
For CPI they have a list of items, typically called a CPI basket, which are the commonly purchased items in most households. This includes food, clothing, fuel, public transport, health/medical, insurance and so on. They check the prices of all the items in the basket, at multiple locations and stores, and update this data monthly. The % change in the total basket cost is published as your inflation % or expressed as CPI index.
So, let’s say this “basket” cost $5,000 this month but $5,050 next month then inflation has been +1% (1% increase in the total spend).
Now obviously, this basket of items doesn’t apply to each person/household the same. For example, fuel might have gone down by 5%, groceries up by 4%, and insurance up by 3% – all these will get averaged, but if you don’t have a car then you may not experience that average. Which is why inflation or CPI are only useful at a society/country level. Each person will experience different inflation rates, depending on what items they are buying for their personal situation.
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