Inflation – Consumer Price Index
The market is a picture or a reflection of the entire social, political, and economic environment. During the last century, many instruments were developed to get a quick appraisal of it. Consequently, almost all countries of the world make public its macroeconomic indicators, which are the name given to the market measurement instruments such as inflation and consumer price index allowing investor and international financial organizations to get a clear picture of their economic and financial situation.
What is Inflation?
Inflation is a financial term used to describe how much the prices has increased on average for goods and services over a period of time, which reflects the market and the country financial situation. The inflation is calculated as a rate and represented as percentages. It indicates how much more money is needed to buy the same product over the time. E.g. In 2016, the price for utilities, food, and gas increases in 5%. Therefore, if those were the parameters used to measure inflation. Then the country’s central bank will report that the inflation for 2016 for that country was 5 points or 5%. It means that to buy something that in 2016 cost 1 USD, it is needed 1.05 USD or 5% more money to buy the same product in 2017. Since inflation affects the people budget directly, and it is needed for national economic planning, it is constantly monitored as one of the most critical national’s financial indicators. The consumer price index is the gold standard instrument to measure a country inflation.
What is Consumer Price Index (CPI)
The consumer price index (CPI) is a financial instrument created for inflation calculations. It is used by most governments and financial agencies. It consists of the periodical price record of certain goods and services. The goods and services are the country representations of the most consumed and needed goods and services for that populations. Therefore it has the power to be considered a valid statically estimation; this group is called the market basket, or basket of goods, or just the basket. The price variation of the basket items are calculated as ratios and represented as percentages. The variations are recorded each month and reported monthly, quarterly or yearly. As the article mentioned before it is the representation of the entire national economic situation.
Understanding Inflation – Consumer Price Index
Inflation reflects the amount of money needed to buy the same good over time. It also reflects the national currency stability and its value as an asset or investment when someone saves money in that particular currency. Inflation is evaluated to estimate the real or final cost of any credit or loan. If the country has a high inflation, the loans are cheaper over time; the opposite makes a loan more expensive. (However, some banks are allowed to use the CPI to made adjustment to previous credit or loans increasing oradjusting the payment in their favor)
The Consumer Price Index can be used to make a price adjustment needed to avoid losing previously invested money by keeping it above or equal to the current national inflation.
The consumer price index variations for any period represent the inflation and the purchasing power of it. It means what people can buy with their salaries.