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Inflation, Inflation Rate - Methodology
What is inflation? How can it be measured?
In general, inflation is the growth of price level over a certain period of time. As a statistical concept, inflation is based on measuring net changes in prices using consumer price indices (CPI). Price indices measure the price level of a selected basket containing representative products and services (about 710 items) in two compared periods. The weights of individual price representatives in the consumer basket correspond to the share of a given kind of consumption which they represent in total household consumption. The consumer basket comprises foodstuffs (food, beverages and tobacco), other goods (clothing, furniture, household utensils, miscellaneous chemist's and small articles, goods for transport and leisure, personal care goods, etc.) and services (in the areas of repair, housing, household running, health and social care, transport, leisure, education, catering and accommodation, personal care and financial services).
Inflation rate is a percentage increase in consumer price indices
What is inflation rate used for?
Information on inflation rate is used e.g. for the purposes of valorising wages, pensions and social incomes. Last but not least, this information is used in connection with renting or other contracts, where the revision is laid down of originally agreed financial payments depending on inflation.
Which inflation rate is the "right" one?
In order to interpret every price index correctly, one should be aware of the period in question. Various numbers are often given, which, though different, are all correct. The precondition are accurate factual, spacial and time definitions. This means that the period for which inflation rate is indicated (the reference period) and, further, the base period which the reference period is compared with, should be mentioned unambiguously.
The following inflation rates are used most frequently:
1) Inflation rate as an increase in average annual CPI;
2) Inflation rate as an increase in CPI compared with the corresponding month of preceding year;
3) Inflation rate as an increase in CPI compared with preceding month;
4) Inflation rate as an increase in CPI compared with the base period (year 2005 = 100).