Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Alternative Indicators of Inflation

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Alternative Indicators of Inflation

Article excerpt

Price stability is achieved, according to some definitions, when inflation is not a factor in the decisionmaking processes of households and businesses. Because of difficulties in measuring the aggregate price level, however, price stability does not necessarily imply achieving a constant level for a specific price index. All statistical measures of inflation are flawed.(3) And, there is no consensus on which of many imperfect measures to "stabilize." As a result, policymakers look at a variety of inflation indicators in gauging progress toward price stability. These indexes differ according to how they are calculated and according to the goods and services they cover.

The consumer price index (CPI) measures the average change in the price of a fixed market basket of goods and services purchased by consumers. The market basket is composed of seven major categories of expenditures--food, housing, apparel, transportation, medical care, entertainment, and other goods and services. Goods and services included in the index may be domestically produced or imported.

The producer price index (PPI) measures average changes in selling prices received by domestic producers of goods. The index is classified by stage of processing, with separate measures for finished goods, intermediate goods, and crude materials. Of all the PPI indexes, e PPI for finished goods is the most closely watched and the one that is cited in this article. …

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