Good day, dear readers and guests of the blog.
Topics about inflation never fade away; moreover, they leave many perplexed: “Why is inflation in the country falling, while prices are constantly rising?” Are we being deliberately misled? The time has come to finally find out everything and figure out what's what.
Inflation is an economic indicator that is accompanied by rising prices for goods and services. In other words, over time, with the same money, people can buy fewer goods and services than before. During such a period, the exchange rate of the national currency falls.
Almost the entire market segment can suffer from inflation. And it doesn’t matter what it might be: a rise in food prices, a decrease in purchasing power, etc. For example, the price of gas rose and a chain of inflation immediately developed - everything related to gas immediately became more expensive: gasoline, transportation of goods. The dollar has risen - everything that is bought with this currency has risen in price. Do not forget that world prices influence and are important. Let's figure out what inflation is and methods for calculating it using various formulas.
As we already know, inflation is an economic indicator. The general price level is calculated based on a fixed set of consumer goods, taking into account the structure of their consumption. This also includes medium- and long-term goods and services. What indicators are used for calculation? Just two:
What does the inflation index show? First of all, it determines how many times the price level has changed. If the indicator is greater than one, then prices have risen, but when the index is equal to one, the general price level is inactive, that is, it has remained at the same level. If the index is less than one, then the general price level has decreased.
If the inflation index shows how many times the price level has changed, then the inflation rate will show how many percent the general price level has changed. But what relationship do these two formulas have?
It's actually simple. When the inflation index is greater than one, prices rise. In this case, the inflation rate will be positive. If the inflation index is less than one, then the inflation rate will take a negative value.
Summary inflation indicators
For several centuries, scientists have tried to create accurate calculation methods that could estimate not only the value of the market basket, but also its composition.
Price and income indices using the Laspeyres formula
Statistician Etienne Laspeyres developed his method of indexing inflation in the 19th century. Its formula shows a comparison of the consumer basket according to the current and base periods and the difference between them.
By showing price fluctuations in the base period, the index excludes changes in cost in consumption patterns. Therefore, he gives a high estimate of inflation if prices rise, and vice versa, a low estimate if they fall.
Paasche index
This calculation method appeared in 1874 by the German economist Hermann Paasche. It is determined by consumer expenditures of the current time to the base period, with the same basket assortment.
The Paasche index shows what changes have occurred: how many times the average price level has increased/decreased. Namely, the price change in the current period. By observing the movement of prices in the consumer basket, this formula is not able to fully capture the income effect. As a result, inflation is overestimated when prices fall, and vice versa, underestimated when prices rise.
Fisher index
Both formulas have their own errors. But the American economist Fisher considered combining them in order to derive an average value.
Nowadays, his method is not as widespread as the previous ones, but also worthy of attention. After all, it is reversible in time, that is, if the periods are rearranged, the value will be the reciprocal of the original index.
Hamburger Index
An interesting technique that cannot be ignored. The name "burger" has a direct meaning. After all, in fact, this popular fast food is sold in every country, so it immediately attracted attention. Thanks to it, you can determine the index for assessing the cost of identical products in different countries.
According to numerous calculations, it turned out that in the previous year Switzerland took first place in the sale of expensive hamburgers costing $6.80, and the cheapest was found in Venezuela, for only 0.67 cents.
Such a simple and unique method was able to show the discrepancy between currencies in countries where the income level is almost the same.
Inflation is always bad for the average person.
Who benefits from inflation?
- Exporters who sell their goods abroad receive foreign currency there, and national currency here. The benefit is obvious
- Debtors who owe a fixed amount.
- Banks that issue low interest rates on deposits. We received money into circulation, but by the time it needs to be returned to the investor, it has depreciated.
- To the state, to increase the level of economic growth by lowering loan rates for manufacturers. This helps stimulate the economy.
What is personal inflation?
The range of the consumer basket is formed and modified by official bodies. However, the set of baskets for each family/person is different. For example, a raw foodist is not interested in buying meat and other products that are harmful to him, or a professional athlete buys most sports nutrition.
Inflation is individual for each of them and will depend on fluctuations in prices for the necessary things. In addition, it is important to take into account all changes in the volume and quality of consumption. Let's say, if a girl decides to lose weight - the amount of food will be sharply reduced, as she will eat less, or children have appeared in the family - expenses, of course, will increase.
Determining personal inflation is simple:
Where, S1 is the amount of expenses in the first month, and S2 is the amount in the next month. But even this method is not able to accurately calculate individual inflation. Since it excludes external factors, affecting the value.
But it is worth remembering that inflation at the state and at the personal level, because these are completely different concepts. Official data reflects the state of the economy. Individual inflation shows the trend in an individual family. If the latest news alarms you, and inflation rates are rising again, do not panic. Plan and manage your expenses in a timely manner so that external shocks affect you as little as possible.
Sincerely, . See you again!
DEFINITION
Inflation is an economic process that manifests itself as an increase in prices for consumer products due to an increase in the number of money supply in circulation. Inflation is the depreciation of money due to an increase in its quantity, so consumers receive different quantities of the same product for the same amount of money.
Inflation is expressed in the following factors:
- rising food prices,
- decrease in the purchasing power of money,
- falling living standards of the population, etc.
High inflation rates indicate crisis phenomena in the economic situation in the state, so it must be reduced by all possible means.
In our country, every year the bodies of Rosgosstat conduct research into statistical data and identify key economic indicators.
Price index
In order to understand the essence of the inflation rate formula, you should refer to the indicators used in its calculation.
The main indicator of inflation is the price index, which measures its level and rate. The consumer price index is determined on the basis of the consumer basket, which is a list of necessary products for the normal functioning of society. The composition of the consumer basket is established in each state at the legislative level.
In order to calculate the consumer price index, you need to determine the base year, which represents the starting point for changes in the cost of products (services). Next, you need to determine the cost of the consumer basket for the base and current year.
To calculate the price index, the value of the current year basket is divided by the same value of the base year.
The price index formula is as follows:
Ic = PC tg / PC bg
Here Ic is the price index indicator,
PC tg – consumer basket of the current year,
PC bg – base year consumer basket in value terms.
Inflation rate formula
Once the price index has been determined, the inflation rate can be calculated. General formula The inflation rate is as follows:
Here CI1 is the price index indicator of the current period,
CI 0 – indicator of the price index of the base period.
Inflation is a dynamic process and therefore tends to increase. It is the inflation rate formula that shows the growth of inflation over a certain period of time. The rate characterizes the rate of increase in prices for basic products and services.
By calculating the inflation rate using the formula, you can determine its type (character):
- Creeping inflation (about 10% per annum),
- Abrupt inflation (from 10-20 to 50-200% per annum),
- Hyperinflation (more than 50% per month)
Most mild form is creeping inflation, easily controlled and preventable. Other types may indicate a structural crisis in the state’s economy, and immediate measures are required.
Examples of problem solving
EXAMPLE 1
| Exercise | Calculate the inflation rate if the consumer basket of the base period included 3 products: A – 15 pieces – 50 rub., B – 10 pieces – 26 rub., C – 5 pieces – 150 rub. Over the year, the price of product A increased by 5 rubles, and the price of product B decreased by 2 rubles. For product C, the price remains unchanged. |
| Solution | First of all, you need to calculate the price index using the formula: Ic = PC tg / PC bg Ic = (15*55 + 10*24 + 5*150) / (15*50 + 10*26 + 5*150) = 1815/1760 = 1.03 or 103% The inflation rate formula for solving this problem is as follows: Tinf. = (IC1 – IC0) / IC0 * 100% T inf = (103-100)/100 = 3% Conclusion. We see that inflation was 3%, which reflects its low level. |
| Answer | T inf. = 3% |
EXAMPLE 2
Data on price increases in our country have been collected by the Federal State Statistics Service (Rosstat) since 1992. The assessment tool is the consumer price index (CPI). It measures the ratio of the value of a fixed set of goods and services in the current period to its value in the base period. It is important that the sample includes goods and services purchased by the population for non-productive consumption.
Methodology. The price monitoring process includes the following steps:
Selection of settlements in which observation is organized
Total 271 settlements(n.p.) That is the sample covers a very wide geographical area;
2-4 cities per subject of the Russian Federation;
In selected villages there must be a stable availability of goods and services included in the index calculation base. Rare, periodically occurring offers are not taken into account;
Population size in selected settlements must constitute at least 35% of the urban population of the subject.
Selection of basic trade and service organizations
More than 58 thousand, including medium, small and large enterprises. The impact of monopoly pricing is minimized;
Both in the center of the village and on the outskirts;
Branded stores, salons, boutiques and other organizations with prices above average are included in the index in proportion to trade turnover. But provided that the goods and services are designed for the mass consumer;
Prices are also recorded at markets and fairs, in mobile tents and kiosks;
Organizations whose price level is many times higher than the average for the selected category are not included. (exclusive salons, boutiques, mainly foreign manufacturers).
Selection of representative goods/services (Consumer basket)
A representative product is understood as a set of brands, models, etc. a certain type of product, which may differ from each other in minor features (details)
The sample of prices under study includes more than 500 titles goods and services;
Single sample for all subjects;
The consumer basket is reviewed no more than once a year;
Includes goods and services of optional use (for example, cars, jewelry made of gold, delicatessen products, etc.);
New items are included in the basket in cases where their share is at least 0.1% of total consumer spending;
The consumer basket is conventionally divided into food products, non-food products and paid services to the population;
When selecting a product, regularity of availability on sale is important;
The selection of goods of specific brands is carried out in proportion to their sales volume using price quotes for each brand;
For each representative product (service), at least 5 price quotes must be registered (as a rule, 5-10 quotes are registered);
The exception is certain types of services for which uniform tariffs apply in the city (electricity, communication services, municipal transport, etc.).
Registration of prices and tariffs
Wholesale prices are not used (bags of flour, sugar, etc.);
In the case of a price quoted in a foreign currency, recalculation is carried out either at the Central Bank rate or at the rate of the selling organization;
Prices are collected by specialists from territorial state statistics bodies;
Registration of changes in prices and tariffs is carried out monthly By full list baskets and weekly for a limited range of goods and services. Thus, the weekly inflation data does not include a number of goods and services and is, in fact, preliminary.
Calculation of average prices (tariffs) for goods and services
At the city level, average prices for representative goods (services) are determined by the formula simple geometric mean value;
Both for the subject of the Russian Federation and for Russia as a whole, the average consumer price for a representative product (service) is determined as arithmetic average weighted. Information on the population size in individual cities and regions is used as weights. Thus, data on prices of the same product/service in densely populated areas have greater weight in the index.
Formation of a system of weights for calculating the consumer price index
The consumer basket is formed on the basis of household consumer expenditures obtained based on the results of a sample survey;
The weighting system is reviewed annually.
Composition of the consumer price index
Below is a partial list of groups of goods and services used in calculating the CPI.
Food products: meat products, fish products, oils and fats, milk and dairy products, cheeses, canned food, eggs, sugar, confectionery, flour, bread and bakery products, pasta and cereals, fruits and vegetables, including potatoes, alcoholic beverages.
Non-food products: fabrics, towels, clothing and linen, furs and fur products, knitwear, hosiery, leather, textile and combined footwear, detergents and cleaning products, perfumes and cosmetics, haberdashery, tobacco products, furniture, carpets and rugs , dishes, watches, electrical goods and other household appliances, printed publications, paper and white goods, bicycles and motorcycles, television and radio goods, personal computers, communications equipment, toys, building materials, jewelry, cars, petroleum products, medical products, medicines.
Paid services: repair, tailoring of clothes and shoes, repair and maintenance of vehicles, repair and maintenance of household equipment, home repairs, hairdressing services, passenger transport services, communication services, housing and communal services, electricity supply services, services in the education system, services in the field of foreign tourism, medical services, legal services, banking services, intermediary and other services.
Core consumer price index
To filter out seasonal fluctuations, demand and supply shocks associated with an administrative, event-related nature, the basic consumer price index is used. It is calculated by excluding certain groups of goods/services from the CPI. For example, it lacks dairy products, vegetables, fruits, alcohol, petroleum products, transport, communication services, and housing and communal services.
Dynamics of the consumer price index
Below is the latest CPI information for each year since December 2009. The CPI in December of each year is equal to 100%.
As can be seen from this chart, the CPI growth in Russia is indeed the lowest in December 2016. — September 2017. At the same time, pronounced deflation is observed in the summer months. During the observation period, price declines were recorded for another six years. The longest price decline (3 months) was observed in 2011. The decrease in the CPI is due to the reduction in prices of fruits and vegetables during the harvest period.
Below is the inflation dynamics since the year of the beginning of price registration in tabular form. Accumulated inflation from the beginning of 2017 to September, according to the CPI, is 1.67%.
Resume
The methodology for collecting consumer prices and calculating their changes is quite complex, covering a large number of consumer goods and services. A sample of settlements and a weighted calculation of average prices, based on population size and volume of consumption of a good or service, allows us to assume a truly objective measurement general level prices in the country.
BKS Express
Inflation as a method of financing is used by the state to pay off its debts of various kinds. In this case, the state simply issues additional money, which immediately goes to pay debts or cover the state budget deficit. But repaying debts in this way produces a negative effect - the real amount of repaid debt, due to the round of inflation caused by the emission, becomes less than it should be. Due to changes in the value of money over time due to inflation, there are two types of financial quantities (indicators): nominal and real.
Nominal indicators are indicators that are displayed in the future without taking into account the value of money over time, that is, directly in monetary units as is, on the scale of the future period. Thus, when considering time intervals with nominal values, we can say that at each interval they have their own scale of measurement. Therefore, it is difficult to compare them. Real indicators are indicators that are displayed in the future, taking into account the value of money over time, that is, scaled to the units of measurement of the base period. Real indicators are comparable, since they are on the same measurement scale.
Nominal values are converted into real values by multiplying by the coefficient of change in the value of money in the period under review relative to the base one. The value of money changes to the inflation rate index.
Real value = Nominal value/Price Index Real purchasing power of money = Nominal purchasing power of money/Price Index
Real Income = Nominal Income/Price Index
In order to see the rate of price changes and compare the real purchasing power of the monetary unit, a price index is calculated:
Price index of the calculation year = Sum of the cost of a set of goods of the calculation year / Sum of the cost of a set of goods of the base year
The price index is also called the price level. Index is a relative value and is calculated for the estimated time in relation to the base time. The price index is calculated for a certain standard set of goods (market basket), the same for the calculation and base time.
Annual inflation rate = (Current year price index - Last year price index)/Current year price index
The so-called “magnitude rule of 70” gives us another way to quantify inflation. More precisely, it allows you to quickly calculate the number of years required for the price level to double. You just need to divide the number 70 by the annual inflation rate:
Approximate number of years required to catch up to inflation rate = 70/rate of annual increase in price level (%)
There are several price indices:
1) Consumer Price Index - the first of them. It measures the cost of a “basket” of consumer goods and services, including certain types of goods (70 items) in different cities (132 cities). The Consumer Price Index (CPI) gives us a good idea of rising prices, but it also has its problems. Let's say that an abstract car today costs 40 times more than twenty years ago - it turns out that inflation was very, very noticeable. In fact, we know that the quality of goods has changed greatly - but the CPI forgets about this. Yes, today's cars are much more expensive, but twenty years ago the set of qualities inherent in the average car produced in 2006-2007 could not be bought for any money. This is one of the channels through which the CPI overstates inflation. In addition, the consumer basket is reviewed quite rarely - this is too labor-intensive. As a result, the CPI also overlooks changes in the structure of our consumption: if we eat apples and pears, and can easily replace one with the other, and the prices for the latter suddenly soar, it would be absurd to assume that we will not switch to apples. However, the CPI does just that, imputing that we are consuming goods that we have not bought for a long time. Again, the inflation rate turns out to be overestimated.
4) Cost of living index - an indicator characterizing the dynamics of the cost of a set of consumer goods and services (in accordance with the actual structure of consumer spending of the population).
There are other, less well-known price indices:
Producer Wholesale Price Index;
The gross national product (GNP) deflator, i.e. the ratio of nominal GNP to real, or an indicator of the fall in real GNP, the inflation of the money shaft (this index is more universal compared to the consumer price index, because it measures the growth of not only consumer, but also all other prices). As an indirect indicator of the level of inflation, data on the ratio of commodity inventories to the amount of monetary deposits of the population is used (a decrease in inventories and an increase in deposits indicate an increase in the degree of inflationary tension). Data on the excess of household income over expenses as a percentage of income can also characterize the level of inflation. If incomes grow faster or even at the same rate as prices, this indicates the danger of an inflationary spiral.
, inflation — main enemy your capital. Simply put, it is the devaluation of money. This is when, relatively speaking, today you can buy less goods for the same money than you could buy yesterday. Where inflation comes from and how it arises is not such a practical question.
We often hear in the news that inflation amounted to such and such percent over the year. In fact, these are very arbitrary figures. But not because Rosstat is lying, but because every person, every family has its own inflation. In addition, there are certain methodological problems in measuring inflation.
The most common method of measuring inflation is the consumer price index. The CPI is based on the size of the consumer basket. The basket includes, in a certain proportion, the average food consumed, clothing, electricity, maintenance of living quarters and vehicles, medical care, recreation and education.
Another way to measure inflation is the GDP deflator. Unlike the CPI, the deflator includes not only the consumer basket, but also final goods and services included in GDP. When calculating the CPI, imported goods are taken into account, and when calculating the deflator, only those produced in Russia. The deflator includes changes in the prices of new goods and services, but the CPI does not.
The consumer basket is a standard set. However, each individual and family has its own set of services and products, which are more or less different from the standard. Consequently, your real inflation will differ from the official one.
Your inflation will be most influenced by what you spend your money on most. If the majority of expenses are food, then personal inflation will have the greatest impact from rising food prices. If a person is a professional athlete and most of his expenses are expensive sports nutrition, supplements, and vitamins, then his inflation will be most strongly influenced by changes in prices for these goods.
How to calculate your real inflation?
Inflation is usually calculated for the year, but can be calculated for the month and quarter. To do this, you will need a report on your expenses throughout the year (two quarters, two months). Count your regular expenses. One-time expenses, such as a car, do not need to be counted (unless, of course, you buy a car every month).
Now take the amount of monthly expenses in the last month of the year and divide by the amount of expenses in the first month of the year. Subtract 1 from the resulting difference and multiply by 100%. For example, expenses in January are 20300, expenses in December are 21100. We calculate:
21100/20300 -1 * 100% = 3.94% Inflation was 3.94%.
This formula takes into account not only rising prices. To calculate net personal inflation, the consumer basket must not change. But the personal consumption basket changes over time. For example, a person used to buy some products, then switched to others, better and more expensive. Or the family has a child and expenses increase. That is, personal inflation also depends on the fact that a person himself begins to spend more, buy more expensive goods or in larger quantities.
Personal inflation can also be negative, for example, if you previously did not monitor your expenses, and then began to optimize and reduce them.
Now let's think about whether inflation is such an evil? There is a process opposite to inflation - deflation. That is, prices do not rise, but decline. How cool, you might think. Not really.
Deflation occurs when official inflation falls below 0%. Deflation usually occurs after a sharp fall in aggregate demand. Demand drops so much that supply begins to exceed demand. To sell goods, sellers are forced to reduce prices. However, consumers are in no hurry to buy expensive goods, because it is clear that after some time the price for them will decrease, and later they will be able to buy even more goods for the same amount of money.
Since people are buying less, companies' profits are declining, and some are suffering losses and bankruptcies. To survive in such conditions, companies are forced to lay off their employees, reduce production and investment, and reduce wages. Which in turn leads to an even greater decrease in demand and everything starts all over again. A deflationary spiral occurs.
As you can see, falling prices are more dangerous for the economy than rising prices. Inflation promotes consumption, forcing people to buy goods and earn money, which in turn leads to economic growth.
For an investor, inflation is dangerous because it reduces the purchasing power of his capital, and therefore the real income from it. Therefore, an investor must look for ways to invest capital so that the growth of his capital exceeds inflation.
