Weighted price indices and disinflation
| English | Español |
|---|---|
| disinflation/ˌdɪsɪnˈfleɪʃn/ | desinflación |
| consumer price index/kənˈsuːmə praɪs ˈɪndeks/ | índice de precios al consumidor |
A decision you can investigate
- Households spend different shares on food, housing and travel. An index must reflect weights rather than simply averaging every price change.
- A falling inflation rate can still mean a rising price level.
Build the explanation
- Inflation is a sustained increase in the general price level; deflation is a decrease; disinflation 通胀放缓 is a slower positive inflation rate. The consumer price index 消费者价格指数 (CPI) compares the cost or price relatives of a representative household basket using expenditure weights. Calculate the rate of change from the previous index, not by subtracting 100 whenever the base is a different period.
- CPI is an average: households with different baskets face different experiences. Substitution, new products, quality adjustment, sampling and changing weights complicate measurement. Producer/wholesale price indices can signal input or output cost pressure before consumer prices change, but margins, productivity, imports and demand affect pass-through.
Work through the evidence
- Fictional basket weights are food 0.5, housing 0.3, travel 0.2, summing to 1. Their current price relatives are 104,110,95 against base 100. Weighted CPI=0.5×104+0.3×110+0.2×95=104. Against prior CPI 100, inflation=(104−100)/100×100=4%. An unweighted mean would be 103 and answer a different question.
- If CPI next becomes 106.08, inflation=(106.08−104)/104×100=2%: disinflation, because prices still rise. A later 2% fall makes CPI 106.08×0.98=103.9584: deflation. A producer index rising from 120 to 126 increases 5%, not 26%; it does not prove CPI inflation will also be 5%.
What is the weighted CPI in the basket case?
52+33+19=104 with weights summing to 1.
Test the limits
- A price index is not a household budget in currency, and an index point is not automatically a percentage change. Use the same scope, population and period when comparing indices. The GDP deflator and CPI cover different expenditure/production sets.
- One product becoming cheaper is not evidence of general deflation. Quality changes or temporary price movements complicate inference. The fictional basket illustrates the calculation; it is not an official national CPI weighting system. Always state the comparison period and interpret both the price level and its rate of change.
What is inflation from 104 to 106.08?
The increase 2.08 is divided by the prior index 104.
Disinflation necessarily means the general price level falls.
The positive inflation rate slows; deflation means the level falls.
Apply and explain your answer
- Why is a rise from 104 to 106.08 described as disinflation after the earlier 4% rate?
- It is a 2% positive rise, so the level continues upward but the inflation rate falls from 4% to 2%.
Why may a 5% PPI rise not become a 5% CPI rise?
Costs are one influence, not a guaranteed one-for-one consumer-price change.
Use the terms precisely
- consumer price index: A weighted index of prices for a representative household goods/services basket.
- disinflation: A decline in a positive inflation rate; the general price level continues to rise.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Fictional basket weights are food 0.5, housing 0.3, travel 0.2, summing to 1. Their current price relatives are 104,110,95 against base 100. Weighted CPI=0.5×104+0.3×110+0.2×95=104. Against prior CPI 100, inflation=(104−100)/100×100=4%. An unweighted mean would be 103 and answer a different question. If CPI next becomes 106.08, inflation=(106.08−104)/104×100=2%: disinflation, because prices still rise. A later 2% fall makes CPI 106.08×0.98=103.9584: deflation. A producer index rising from 120 to 126 increases 5%, not 26%; it does not prove CPI inflation will also be 5%.
A price index is not a household budget in currency, and an index point is not automatically a percentage change. Use the same scope, population and period when comparing indices. The GDP deflator and CPI cover different expenditure/production sets. One product becoming cheaper is not evidence of general deflation. Quality changes or temporary price movements complicate inference. The fictional basket illustrates the calculation; it is not an official national CPI weighting system. Always state the comparison period and interpret both the price level and its rate of change.
Inflation is a sustained increase in the general price level; deflation is a decrease; disinflation is a slower positive inflation rate. The consumer price index (CPI) compares the cost or price relatives of a representative household basket using expenditure weights. Calculate the rate of change from the previous index, not by subtracting 100 whenever the base is a different period.