3. What are the causes of inflation? How is inflation measured?

How is inflation measured?

Statistical agencies measure inflation by first determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation, or percentage change, over time, agencies compare the value of the index over one period to another, such as month to month, which gives a monthly rate of inflation, or year to year, which gives an annual rate of inflation.
For example, in the United States, that country’s Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by regions and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index—published by the US government’s Bureau of Economic Analysis—takes into account a broader range of consumers’ expenditures, including healthcare. It is also weighted by data acquired through business surveys.
Inflation decreases the value of a dollar (or other currency), and as inflation rises, your money can buy less and less. Economists measure the increase or decrease in inflation over time. This measurement is known as the inflation rate. We see the effect of inflation in many areas of our lives. Some of these effects include price increases for housing, food, fuel, and consumer goods. While there may be some benefits to moderate inflation, consumers tend to focus most on the fact that it means their money can’t go as far as before.
EXAMPLE
For a real-world example of inflation, let’s look at the price of gasoline. According to the U.S. Bureau of Labor Statistics, the price of gas saw an inflation rate of about 4.75% per year between the years 2000 and 2022. So a tank of gas that cost $20 in 2000 would cost you more than $55 in 2022. That’s a pretty hefty increase. The inflation rate for gas during that time period was about 1% higher than the overall rate of inflation.