The document discusses inflation and how it is measured over time. It provides an example showing how much the price of common items like the New York Times, home prices, and average manufacturing wages have increased from 1970 to 2008. It then explains some of the most commonly used price indexes to measure inflation, such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Formulas are provided for calculating the CPI and measuring the inflation rate between two time periods. Pros and cons of inflation are also briefly mentioned but not detailed.

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Inflation is an increase in the average level of prices, and a price
is the rate at which money is exchanged for a good or service.
Here is a great illustration of the power of inflation:
In 1970, the New York Times cost 15 cents, the median price of a
single-family home was $23,400, and the average wage in
manufacturing was $3.36 per hour. In 2008, the Times cost
$1.50, the price of a home was $183,300, and the average wage
was $19.85 per hour.

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Measuring Inflation
• Types of Price Indexes
• Depending upon the selected set of goods
and services used, multiple types of baskets
of goods are calculated and tracked as price
indexes. Most commonly used price indexes
are the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).

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Measuring Inflation
• Calculating CPI
CPI = weighted current price x 100
weighted base period price
Example = $3.00 (loaf of bread in 2017) X 100
$1.32 (loaf of bread in 1983)
CPI 2017 = 227.3

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The Wholesale Price Index
• The WPI is another popular measure of
inflation, which measures and tracks the
changes in the price of goods in the stages
before the retail level. While WPI items
vary from one country to other, they mostly
include items at the producer or wholesale
level. For example, it includes cotton prices
for raw cotton, cotton yarn, cotton gray
goods, and cotton clothing.

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The Producer Price Index
• The producer price index is a family of
indexes that measures the average change in
selling prices received by domestic
producers of intermediate goods and
services over time. The PPI measures price
changes from the perspective of the seller
and differs from the CPI which measures
price changes from the perspective of the
buyer.

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The Formula for Measuring
Inflation
• The above-mentioned variants of price indexes can be used to calculate the
value of inflation between two particular months (or years). While a lot of
ready-made inflation calculators are already available on various financial
portal and websites, it is always better to be aware of the underlying
methodology to ensure accuracy with a clear understanding of the calculations.
Mathematically,
• Percent Inflation Rate = (Final CPI Index Value/Initial CPI Value)*100

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Inflation Rate—the monthly or
yearly % change in prices.
– The CPI is a tool that is used to calculate
Ex.Inflation rate= (CPI year – CPI year B) x 100
CPI year B
Ex.Inflation Rate 145 – 140 x 100 = 3.57
140
Inflation Rate 3.57%

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Pros and Cons of Inflation

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