Price Indices and Inflation
Introduced| English | Meaning |
|---|---|
| inflation/ɪnˈfleɪʃn/ | A sustained increase in the general price level of goods and services. |
| deflation/diːˈfleɪʃn/ | A sustained fall in the general price level of goods and services. |
| disinflation/ˌdɪsɪnˈfleɪʃn/ | A reduction in the rate at which the general price level is rising. |
| base year/beɪs jɪə/ | The reference year used for comparison when constructing an index or measuring values at constant prices. |
| Consumer Price Index/kənˈsuːmə praɪs ˈɪndeks/ | An index tracking changes in the cost of a representative basket of goods and services purchased by consumers. |
| price index/praɪs ˈɪndeks/ | A measure of the price of a representative set of goods and services relative to a base period. |
| fixed market basket/fɪkst ˈmɑːkɪt ˈbæskɪt/ | A specified set of goods and quantities whose cost is compared across periods in a fixed-basket price index. |
| inflation rate/ɪnˈfleɪʃn reɪt/ | The percentage change between two index values. |
| biased/ˈbaɪəst/ | Systematically shifted away from the quantity being estimated, rather than differing only through random error. |
| substitution/ˌsʌbstɪˈtjuːʃn/ | Replacing one good, input or activity with another to meet a need or perform a function. |
| quality change/ˈkwɒlɪti tʃeɪndʒ/ | A change in a product's characteristics or performance that must be distinguished from a pure change in its price. |
When the whole price tag rises
- One good getting dearer is normal — but what if everything creeps up at once?
- That is a change in the general price level, and it has a name.
- Track it and you can tell a healthy economy from an overheating one.
- Three words describe how the price level moves.
Inflation, deflation, disinflation
- Inflation 通货膨胀 — the general price level is rising.
- Deflation 通货紧缩 — the general price level is falling.
- Disinflation 反通货膨胀 — inflation is still happening, but slower than before (prices rise, just less quickly).
Inflation, deflation, or disinflation?
Inflation is a rising price level; deflation is a falling one; disinflation is inflation that is still positive but slowing.
Inflation is:
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Inflation is the average of all prices rising, not just one good.
Inflation slows from 8% to 3%. This is:
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Prices are still rising (positive inflation), just more slowly — disinflation.
The Consumer Price Index
- A price index 价格指数 tracks the price level; the best-known is the Consumer Price Index 消费者价格指数 (CPI).
- It uses a fixed market basket 固定商品篮子 — a set list of goods a typical family buys, so changes come only from prices.
- Each period is compared to a base year 基年, whose index is set to 100.
- $\text{index} = \dfrac{\text{cost of basket now}}{\text{cost of basket in base year}} \times 100$.
A basket costs 400 in the base year and 440 now. What is this year's price index?
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Index = (440 ÷ 400) × 100 = 110.
A price index is set to 100 in the chosen ______ year.
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All other years are compared to the base year's index of 100.
Measuring the inflation rate
- The inflation rate 通货膨胀率 is the percentage change between two index values.
- Worked idea. A basket costs 400 in the base year and 440 now, so this year's index is $\dfrac{440}{400} \times 100 = 110$.
- The base-year index is 100, so inflation is $\dfrac{110 - 100}{100} \times 100 = 10\%$.
- The CPI can be biased 有偏差: the fixed basket ignores substitution 替代 and quality change 质量变化.
The price index rose from 100 to 110. What is the inflation rate, in percent?
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Inflation = (110 − 100) ÷ 100 × 100 = 10%.
Select all reasons the CPI can be a biased measure of the cost of living.
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Substitution and quality change, plus the fixed basket, make the CPI slightly overstate the cost of living.
The general price level rises (inflation), falls (deflation), or rises more slowly (disinflation). The CPI measures it with a fixed basket against a base year = 100. The inflation rate is the percentage change in the index; the CPI is slightly biased by substitution and quality change.
Write from a price index of 125
- A basket cost 200 in the base year and costs 250 now.
- Find this year's price index.
A basket cost 200 in the base year and costs 250 now. What is this year's price index?
250 is 1.25 times 200, so the index is 125.
What is this year's price index?
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250 divided by the base cost of 200, times 100, is 125. Other options — 110 (the lesson index); 50 (the rise in the basket's cost).