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KingBingo

How Should We Measure Inflation?

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Just asking the question since we debate 'inflation' on this board all the time. I thought a really back to basics thread on what is inflation and how do you even measure it might be nice.

Any thoughts or will this quickly drop off the front page?

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should be a measure of IOUs the central bank has issued.

any growth would be offset by wealth creation.....thats the hard thing to measure...Im sure the BoE has a record to the penny of its commitments.

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The dictionary definition of inflation is changes in prices. It normally implies price increases. Deflation is identical, but in the opposite direction. If I could buy an apple in 2008 for £0.50 and it costs £0.55 in 2009, the annual rate of apple inflation that year was 10%. If it had fallen to £0.45, the rate of apple inflation would have been -10% (i.e. deflation).

'Inflation' usually refers to the change over time in how much it costs (in £) to buy goods and services. Statisticians normally estimate the rate of inflation using a basket of representative goods and services. Many laypeople (and professional economists) mistrust the official measures. Unfortunately, nobody can really tell you who is right.

Wage inflation is the change over time in how much it costs (in £) to get somebody to work for you. Pay rises = wage inflation.

There is a tendency among many posters on here to make claims such as "inflation is a growth in the money supply" and so on, but this is not the definition of inflation. Inflation is simply numbers on price stickers, which occasionally get crossed out and changed. The interesting question is what causes the person responsible for setting the price of an apple/car/house to change the number on the price tag and in which direction. In general, the economic factors which cause inflation are poorly understood and inflation is difficult to predict.

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This is bloo loo - before he shaved his chest hair off...

21185.jpg

my god, I look like Krusty!

the shame

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The dictionary definition of inflation is changes in prices. It normally implies price increases. Deflation is identical, but in the opposite direction. If I could buy an apple in 2008 for £0.50 and it costs £0.55 in 2009, the annual rate of apple inflation that year was 10%. If it had fallen to £0.45, the rate of apple inflation would have been -10% (i.e. deflation).

'Inflation' usually refers to the change over time in how much it costs (in £) to buy goods and services. Statisticians normally estimate the rate of inflation using a basket of representative goods and services. Many laypeople (and professional economists) mistrust the official measures. Unfortunately, nobody can really tell you who is right.

Wage inflation is the change over time in how much it costs (in £) to get somebody to work for you. Pay rises = wage inflation.

There is a tendency among many posters on here to make claims such as "inflation is a growth in the money supply" and so on, but this is not the definition of inflation. Inflation is simply numbers on price stickers, which occasionally get crossed out and changed. The interesting question is what causes the person responsible for setting the price of an apple/car/house to change the number on the price tag and in which direction. In general, the economic factors which cause inflation are poorly understood and inflation is difficult to predict.

not really, how can you have inflation measured by prices when all prices vary...houses down, eggs up?

no, price inflation is caused by many other factors, whereas money supply inflation, ie the measure of the value of a unit of currency against a measure of value, is caused by the oversupply or not of the currency units.

too many units, and the currency is worth less.

all other prices stem from this value and are themselves further adjusted by supply and demand, tax, and other factors.

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Could we have 3:

- Prices (some combined CPI/RPI)

- Wages

- Money Supply (agreed standard reviewed whenever new products created)

And the government need to explain if there are bigger than 1% diffs between the 3.

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Personally I'd do away with big "headline" composite indices, as these are pretty meaningless, and instead go for a series of smaller indices to measure changes in cost of living essentials and almost-essentials excluding housing (food, water, power, transport, mandatory indirect taxation), net pay (as if, after tax), non-essentials (home entertainment systems, holidays, injection-moulded plastic dogplops, etc.), and housing itself.

To my mind, a major part of the reason we're in the mess we are at the moment is because inflation levels in different types of "stuff" have, over the last ten or so years, been all over the place, and have yet the dozy headline figures used have completely failed to pick this up. In terms of policy, if you could get all those indices going along together as smoothly as possible, you'd have a pretty well balanced system. Okay, it wouldn't be easy, and it would require a much more sophisticated approach than the Big Interest Rate Lever, but I suspect it would be well worth a try.

If a single inflation rate is needed, then it's probably easiest to just think of a number and say it's that every month, as it would arguably be no less meaningful than the current system.

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Inflation is when your money buys less.

Deflation is when your money buys more.

It is easy to measure/quanitify units of money and prices which leads to all sorts of equations.

But it is more difficult to measure the intangible "purchasing power" of money which is what inflation/deflation is all about.

Edited by roman holiday

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Money supply.

The tricky thing being to find out what that actually is, in a system based almost entirely on fraud.

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There is a tendency among many posters on here to make claims such as "inflation is a growth in the money supply" and so on, but this is not the definition of inflation. Inflation is simply numbers on price stickers, which occasionally get crossed out and changed. The interesting question is what causes the person responsible for setting the price of an apple/car/house to change the number on the price tag and in which direction. In general, the economic factors which cause inflation are poorly understood and inflation is difficult to predict.

You need a better dictionary.

From the OED:

6. Great or undue expansion or enlargement; increase beyond proper limits; esp. of prices, the issue of paper money, etc. spec. An undue increase in the quantity of money in relation to the goods available for purchase; (in lay use) an inordinate rise in prices.

Origin of the word inflation (from wiki):

Inflation originally referred to the debasement of the currency. When gold was used as currency, gold coins could be collected by the government, melted down, mixed with other metals such as silver, copper or lead, and reissued at the same nominal value. By diluting the gold with other metals, the government could increase the total number of coins issued without also needing to increase the amount of gold used to make them.

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Personally I'd do away with big "headline" composite indices, as these are pretty meaningless, and instead go for a series of smaller indices to measure changes in cost of living essentials and almost-essentials excluding housing (food, water, power, transport, mandatory indirect taxation), net pay (as if, after tax), non-essentials (home entertainment systems, holidays, injection-moulded plastic dogplops, etc.), and housing itself.

To my mind, a major part of the reason we're in the mess we are at the moment is because inflation levels in different types of "stuff" have, over the last ten or so years, been all over the place, and have yet the dozy headline figures used have completely failed to pick this up. In terms of policy, if you could get all those indices going along together as smoothly as possible, you'd have a pretty well balanced system. Okay, it wouldn't be easy, and it would require a much more sophisticated approach than the Big Interest Rate Lever, but I suspect it would be well worth a try.

If a single inflation rate is needed, then it's probably easiest to just think of a number and say it's that every month, as it would arguably be no less meaningful than the current system.

I definitely agree, the headline 2% inflation figure is almost meaningless against the noisiness of the real world. When prices for life's essentials (food, energy, housing) go up the pain is felt much more than when prices for luxuries go up. RPI and CPI are made up of sub-baskets for leisure, transport etc but these are too rough to distinguish the needs from the wants.

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