Profile
Settings
Refer your friends
Sign out
Inflation means the change of prices of goods over a period of time. This change in prices can be because of several reasons. Inflation is measured on the basis of a number of factors by the government. Various metrics have been devised by economists that give a clear and relative picture of what the ground reality is. The task of comparing prices might seem simple at first glance, but it is one of the most complicated things to do.
Consumer Price Index
CPI is one of the best measures of inflation. It mirrors the overall change in the living price of an individual over a period of time. Under CPI, inflation is measured on the basis of a number of factors that don’t get included in the RPI (Retail Price Index, we are going to look into it too).
There are many financial services that an individual makes use of while sustaining their existence. These financial services are excluded from the RPI, which only gives an overview of increases in prices, whereas CPI, one of the best measures of inflation, calculates it on the basis of the overall cost of living. There are financial services, and their cost is included in this index (CPI).
CPI also includes the taxes that an individual has to pay with every increasing year. Since taxes are also a part of the expenditure of the people, one has to include the yearly increase as part of the cost of living.
Retail Price Index
To know which of the following measures is adopted to reduce inflation, one has to understand all of the indexes used for them. And the next one on our list is the RPI. Now, just like CPI, it takes into account a lot many factors that affect the life of a common individual. But then, it tends to be more volatile than CPI.
In a nation, inflation is measured on the basis of a number of factors, of which the rate of interest on mortgages is also one. But it was found that the change in RPI was way too turbulent when the interest rate was included. Thus, to make it more stable and to give a better picture of the economy, it was replaced with CPI.
Although RPI is no longer used as a national statistic in many places, it continues to present an overview of the condition of the economy.
Wage Inflation
Another factor that one has to keep in mind is the change in the wages of the employees of the nation. If the wages they earn have been rising continuously over the last few years, the underlying factor has to be inflation. While talking about which of the following measures is adopted to reduce inflation, we are also simultaneously talking about the wages of employees and their livelihood.
One cannot ignore the changes in wages taking place all over the economy. Earning wages is the only option that a lot of people have at their disposal to support their families. If the rate of increase in prices is greater than the rate of increase in their wages, then they will slowly fall off the wagon of welfare.
If wage inflation is not used as one of the measures of inflation, then we will have no way of measuring how the increase in prices is affecting a common, wage-earning individual.
Core Inflation
Food and the commodities we buy to support our lifestyle form only a small part of the overall basket of commodities that we require for our sustenance. Other factors affect our well-being. These services include the facilities that the government makes available to us or the cost of our natural resources. In a national context, inflation is measured based on such commodities too.
As any economist of national significance will tell you, the government also incurs expenses when they are providing services to the nation. These services do not come cheap. And with every year that prices go up, so does the expenditure of the government. To measure thins change in the cost of its services; the government makes use of indicators; inflation is measured on the basis of the Core Inflation
Conclusion
There are many factors inflation is measured on the basis of, but the most important one is CPI. It represents the condition of the economy. The government uses CPI to form fiscal and monetary policies that can curb inflation or ramp up production. The upward or downward trend of the economy is also highly affected by the change in the rate of inflation. There have been other measures of inflation, too, like RPIX, which are now obsolete and discarded.
