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| Inflation Materials Test (Photo credit: megananne) |
When the price of gasoline goes up, it costs you more money to fill up your vehicle at the gas pump. Although the amount of money allocated to fuel takes a bigger percentage of your paycheck, you get the same amount of gas. This hit to your bottom line leaves you with less money to spend on other items.
In less-developed countries, food price inflation is an ever-greater concern. When the price of basic food items increases significantly, low-income consumers experience severe hardships. In recent years, food price inflation has resulted in public demonstrations and rioting in numerous countries across the globe, including Chile, Morocco, Tunisia and Algeria.
Measuring Inflation
There are several ways to measure inflation. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI). The Bureau of Labor Statistics releases the CPI monthly. It calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy as an annual percentage increase. For example, a headline inflation figure of 3% equates to a monthly rate that, if repeated for 12 months, would create 3% inflation for the year.
There are several ways to measure inflation. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI). The Bureau of Labor Statistics releases the CPI monthly. It calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy as an annual percentage increase. For example, a headline inflation figure of 3% equates to a monthly rate that, if repeated for 12 months, would create 3% inflation for the year.
The headline inflation figure is not adjusted for seasonal changes in the economy or for the often-volatile elements of food and energy prices. Headline inflation is the measure that has the most meaning for consumers, as we have to eat food and fuel our cars.
Core inflation, which is the Federal Reserve's preferred yardstick, is a measure of inflation that excludes food and energy. Core inflation eliminates these items because they can have temporary price shocks that can diverge from the overall trend of inflation and give what the prognosticators at the Federal Reserve view as a false measure of inflation. Core inflation is most often calculated by taking the Consumer Price Index and excluding certain items (usually energy and food products). Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.
Several variations on inflation are also worth noting. Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in a single month.
Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices. At the other end of the spectrum is deflation, which occurs when the general level of prices is falling. ... Read more.
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