What is the basic inflation?

Basic inflation attempts to measure the degree for which the general price level of goods and services grows. This is an important economic indicator, because when the general level increases, purchasing power is declining. This situation is reflected in the lower standard of living, because a rapid increase in price levels means that fewer goods and services can be purchased for the same amount of money. Basic inflation can be distinguished from the main inflation, as the first excludes the increase in food and energy, while the latter includes these more volatile elements. The unpredictable nature of food and energy prices can be attributed to the fact that the prices of these commodities are sensitive to the offer changes. The offer of food can be influenced by drastic weather conditions such as floods or drought, which in turn reduces the offer and causes steep price increases. The energy supply can be influenced by decisions taken by the organizations of oil export countries (OPEC) of the cartel, resulting in a similar increase in prices. Calculation of basic inflation therefore removes these volatile elements, because the goal is to come up with a character that represents a real price increase, not prices that are affected by short -term bid shocks.

Two measurements are commonly used to find basic inflation. One of these indices with food and energy prices deducted from them can be used to determine the Earth's basic inflation. Both indices look at personal consumption, but there is an important difference between them.

Consumer price index (CPI) measures consumption based on the weighted diameter of the fixed basket of goods, which means that regardless of the top it is assumed that the increase in prices of different goods will become the same selection. The personal consumption index (PCE) acknowledges that consumers can modify their expenses in order to suit prices. For example, if meat prices too increase, people can spend less on meat and more vegetables; Therefore, PCE takes into account these changes.

The aim of the governments

It is a measure of governments to control basic inflation so that there is a more gradual increase in general price levels. This is a preferred situation because a general increase in prices improves the likelihood that citizens can maintain the required standard of living. Measurement of basic inflation is also important to indicate the direction of real and potentially permanent price changes used in the design of government policy. Basic inflation data basically give governments to know what areas of economies require attention and need the development of the program to limit further price increases.