Inflation

Inflation is a deceptively simple concept: as everyone already knows, it is the rate at which prices rise. However the accurate definition and measurement of inflation is not that easy.

There are far too many goods and services produced in and imported by an economy for it to be feasible to gather data on the prices and sales volumes of every single one. Inflation is therefore usually measured as the percentage change in a representative basket of goods.Inflation is also not a single number because consumers, businesses and the real terms adjustment of economic indicators all require different measures.

It are also difficulties in deciding how to treat financial services. For example, higher mortgage interest payments would be an extra expenditure for many people. However, strictly speaking, they represent economic rents (transfers of wealth) rather than payments for services, and therefore should be excluded from inflation measures.

In the UK, a number of different inflation measures are published by the Office of National Statistics. These include the consumer price index (which excludes mortgage interest payments and certain other housing related costs) and the retail price index (which includes them) and the very different GDP deflater.

Another difficulty is that the products available at different times may be different in ways that make direct price comparisons less meaningful. The most common problem is that the quality of products is often improved by advancing technology: consider a comparison of the cost of a song on CD with that of a vinyl recording from thirty years previously. The (partial and rather difficult) solution is the use of hedonic price indices.

Negative inflation is called deflation. It is uncommon, usually occurring during depressions.

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