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1 1 (November 22, 2021)

handle is hein.crs/govegpi0001 and id is 1 raw text is: Introduction to U.S. Economy: Inflation What Is Inflation? inflation incl Inflation is defined as a general increase in the price of the basket of goods and services across the economy, or, in other words, and food pric a general decrease in the value of money. Conversely, often used by deflation is a general decrease in the price of goods and to the volatile services across the economy, or a general increase in the However, he value of money. sense of the r As inflation occurs, individuals can purchase fewer goods Figure I An and services with the same amount of money. For this January I 960- reason, an individual would need about $326 in 2021 to purchase the same amount of goods and services as $100 would have purchased in 1980. Measures of inflation are used to adjust money figures to keep purchasing power constant over time, allowing for more accurate comparisons across disparate time periods. Monetary figures that have been adjusted for inflation are referred to as real, and non- inflation-adjusted figures are referred to as nominal. Measuring Inflation 2 The rate of inflation can be measured by observing changes in the average price of a consistent set of goods and services, often referred to as a market basket. Inflation is generally measured using a price index, such as the Consumer Price Index (CPI). A price index is constructed Source: Burea by dividing the price of a market basket in a given year by Notes: Annual the price of the same basket of goods in a base year. The Consumption E rate of inflation is then measured by calculating the percentage change in the price index across different Complicath periods. For example, the CPI was about 260 in October The fundame 2020 and about 277 in November 2021, which amounts to changes in th an inflation rate of about 6.2% over this 12-month period. time. Howev reasons. First Alternative Measures of Inflation time. As such Alternative price indices will use different goods within is due to imp their market baskets and are generally used for different Second, new purposes. For example, the CPI includes consumer goods over time tha and services typically purchased by households, which is previously av often used to adjust household incomes for inflation over incorporated time. By contrast, the gross domestic product (GDP) Statistical ag deflator, which is generally used to adjust GDP for inflation factors, beca over time, measures inflation for all of the final goods and accounted foi services produced in the United States. There are a number most likely o of additional measures of inflation, including the Producer Price Index, Employment Cost Index, Personal a Consumption Expenditures Index, and Import/Export Price Inflation is la Index. Different inflation measures are calculated which are oft differently. For example, the CPI uses a (mostly) fixed inflation. De basket of goods and services, whereas the GDP deflator goods and se allows the composition of its market basket to change with economy's c spending patterns from period to period. demand exce money chasi Additionally, within a specific price index, researchers placed on pri often make separate calculations for so-called headline inflation and core inflation, as seen in Figure 1. Headline Cost-push in and services Updated November 22, 2021 ides the full set of goods and services within goods, whereas core inflation excludes energy es from the basket of goods. Core inflation is researchers in place of headline inflation due nature of the price of food and energy. adline inflation can provide a more accurate 'rice changes actually faced by individuals. nual Inflation Rate October 2021 u of Economic Analysis. percentage change as measured by Personal xpenditures Index. ons in Measuring Inflation ntal concept behind inflation is to measure e price of the same goods and services over er, in reality, this is nearly impossible for two the quality of goods and services change over , some portion of increasing prices over time rovements in quality rather than inflation. products are introduced into the marketplace t are fundamentally different than any ailable products and are only slowly into price indices with fixed baskets. encies try to adjust data to account for these use, if these complications are not correctly , measured inflation would be inaccurate and verstated. F Inflation rgely the result of two different phenomena, en referred to as demand-pull and cost-push nand-pull inflation occurs when demand for rvices within the economy exceeds the apacity to produce goods and services. As eds supply within the economy-too much ng too few goods-there is upward pressure ces, resulting in rising inflation. flation occurs when the price of input goods increases. The classic example of cost-push

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