It seems like just about everybody has been talking about inflation as of late. The sudden increase in inflation has resulted in hardships for many everyday people in the form of rising prices for goods and services and higher costs of living overall. This is why economists are always keeping a close eye on how much inflation rises and at what rate it is increasing.
There are various different metrics economists use to measure inflation. These metrics are various price indices which track certain groups of goods and services. The most commonly utilized price indices are the Consumer Price Index (CPI), the Whole Price Index (WPI) and the Producer Price Index (PPI).
Consumer Price Index
The CPI attempts to measure inflation by focusing on price fluctuations in primary consumer needs. This index is made up of a weighted average of prices paid by consumers for a select group of goods and services which include medical services, food, and transportation.
The price of the select goods and services are the retail prices which consumers ultimately pay. The CPI looks at the price changes of these items and averages each item based upon the weight of each item relative to the entire set of goods and services being measured.
Economists and market watchers use fluctuations in the CPI figure to better understand changes in the cost of living. The CPI is one of the most referenced inflation gauges available and has been calculated by economists since 1913. The Bureau of Labor Statistics (BLS) reports the CPI every month in the U.S.
Wholesale Price Index
Another commonly used inflation measure, the WPI, measures the price of goods further up the supply chain, before reaching the retail level where consumers will buy. This means measuring prices producers and wholesalers pay. For example, the WPI includes items such as cotton yarn, raw cotton, and cotton clothing. However, each country will have their own version of WPI which will vary as to specifically which goods are included in calculating the index.
Producer Price Index
The U.S. does not use the WPI like many other countries, but instead utilizes a similar index, the PPI. This index is actually a measure of various different indices. The PPI calculates the average change in prices for intermediate services and goods paid by domestic producers over time. The PPI, similar to the WPI, is measuring price fluctuations experienced by the seller rather than the end consumer which is what the CPI looks at.
An overall measure
Each of these inflation-measuring indices reflect an overall view of the aggregate economy. This means an increase in price of one component may be canceled out by the declining price of a different item included in the index. It is a good idea to keep this in mind when trying to put any of these indices into context.
Dealing with inflation
Of course, it is important to understand when inflation is rising and at what rate it is increasing. This can have a significant effect on your cost of living as well as your investment returns. However, you may need to take action in order to mitigate any damage inflation can cause to your investment portfolio. Fortunately, a knowledgeable financial advisor can help you in rebalancing your portfolio with inflation risk in mind.