Introduction to Inflation

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Inflation

Inflation is defined as the steady and persistent rise in the general level of prices and a reduction in the purchasing power of money

Inflation is calculated using a COMPOSITE PRICE INDEX

Constructing a Composite Price Index

There are several steps in this process:

Step 1: Choose a base year

Step 2: Decide which goods to include

Step 3: Find the price of the goods

Step 4: Calculate a SIMPLE PRICE INDEX for each good (New Price/Base Year Price x 100)

Step 5: Find the weigh of each item (this is the percentage of income spent on each good)

Step 6: Multiply each index number by its weight

Example Composite Price Index

Introduction to Inflation