Inflation rate : Definition and calculation

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Definition of inflation rate

The inflation rate is the percentage increase/decrease in the prices of goods and services over a given period.An increase in inflation is often associated with a fall in purchasing power.Purchasing power is the difference between income and inflation. If the inflation rate is higher than the revenue growth rate, then there is a loss of purchasing power. Conversely, if the rate of inflation is lower than the rate of income growth, then purchasing power increases.

inflation rate

Calculating the inflation rate

The inflation rate is calculated using the Consumer Price Index (CPI). Every month, the Bureau of Labor Statistics Data (BLS) calculates the price of a basket of goods and services of constant quality, representative of household consumption (foodstuffs, electricity and gas prices, rent levels, petrol prices, etc.). If the price of this average basket rises, then the inflation rate is positive. If the price of this average basket lowers, then the inflation rate is negative. In practice, a negative inflation rate is called deflation.

To fully appreciate changes in the inflation rate, it is not the figure published each month that is important; it is the overall trend. This makes it possible to determine whether the level of inflation is accelerating or slowing down.

In practice, annualized inflation is often used to smooth out seasonal variations.The inflation rate then corresponds to the average inflation rate over the last 12 months. Each month, a sliding average is calculated. For example, the inflation figure for March is a calculation of the average inflation since March of the previous year.In April, the inflation rate is calculation of the average inflation since April of the previous year, etc.

In the US, the inflation rate issued by the Bureau of Labor Statistics Data serves as a reference for re-evaluating the basic minimum wage, pension levels, tax free savings rate, maintenance payments, etc.

Comparison of inflation rates

Each country has its own method of calculating the inflation rate. Before making comparisons between countries, it is therefore very important to understand the calculation mechanism of each country. In the European Union, the problem does not arise. In fact, Eurostat (the Statistical Office of the European Union) calculates its own inflation rates using a common method (which enables comparisons between countries).Each month the office publishes:

- The inflation rate of the European Union (EICP)
- The rate of inflation in the euro area (MUICP)
- The inflation rate in each member country (HICP)

These inflation rates serve as a reference for the ECB (European Central Bank) to steer its monetary policy within the Eurozone.

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