Inflation
From Financial Literacy Wiki
Inflation refers to a general rise in prices measured against a standard level of purchasing power. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost but does not reflect an increase in quality. The increase in costs would then be known as the inflation rate for the period between the two points in time.
There are, therefore, many measures of inflation depending on the specific circumstances. The most well known are the CPI (Consumer Price Index) which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.
Consumer Price Index
Consumer Price Index (CPI) or Retail Price Index (RPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and considered by some a cost-of-living index.
GDP Deflator
GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.
The GDP deflator is not based on a fixed market basket of goods and services. The basket is allowed to change with people's consumption and investment patterns. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices.
