DEFINITION

Inflation is an economic process that manifests itself as an increase in prices for consumer products due to an increase in the amount of money 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. The general formula for 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 pace 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)

The mildest form is creeping inflation, which is 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

Sergey Antonov

loves statistics

But it’s hard to believe: for example, gasoline prices have risen by almost 10% over the year. We figured out how inflation is calculated, what affects price increases, and whether Rosstat can be trusted.

What is inflation

When the population and companies have more money than goods on shelves and warehouses, demand begins to grow and sellers raise prices. As a result, money depreciates: after some time, the same amount can buy fewer goods. The general increase in prices is inflation. In Russia, this indicator is calculated by Rosstat. In the language of statisticians, it is called the consumer price index.

In fact, there are now two types of money in the country: cash - bills and coins; as well as non-cash payments, which are in the accounts of the state and banks. All monetary circulation in Russia is controlled by the Central Bank. If they believe that the country needs more money, then the Central Bank orders more cash from Goznak and, at the same time, reduces the key rate - the percentage at which the state lends to commercial banks.

It happens that prices do not rise, but fall. This process is called deflation. But there is nothing good about deflation: it becomes unprofitable to produce goods and the economy slows down. The most famous crisis that occurred against the backdrop of deflation was the Great Depression in America in the thirties. The ideal situation for economic growth in the country is low inflation of 1-2%.

How Rosstat calculates inflation

To calculate inflation, statisticians use the consumer basket. It includes about seven hundred goods and services: from bread, cereals and vegetables to household appliances and cars. Every month, statisticians in all regions of the country monitor prices for these goods and services in stores, markets and directly from manufacturers, and then display the average value for the country.

The composition of the consumer basket of statistics changes annually, studying the real expenses of Russian families. In 2018, 37.5% of Russians' spending was on food, 35.2% on non-food products, and 27.3% on services. Within these three categories, spending on individual goods is distributed.

For example, according to statisticians, 9.3% of expenses go to meat, 9.9% to utilities, 1.5% to education. The basket also includes large purchases: travel, building materials, computers.

They are also reviewing the composition of the basket and its structure because new goods appear on the shelves, and Russians are starting to spend more on some things. For example, in 2006, gasoline accounted for 2% of the consumer basket, and in 2018 it was already 4%. And prices for smartphones 12 years ago were not taken into account at all.

In addition to this large consumer basket, Rosstat separately considers changes in the basic consumer price index. This is a set of 83 goods whose prices are least dependent on sudden changes in the economic situation or season: for example, meat products, bakery products, utilities, public transport. Statisticians use changes in the cost of such a basic consumer basket when calculating weekly inflation.

There is also a third consumer basket - with a minimum set of goods, which includes 33 food products. Changes in prices for the minimum set are used when calculating the cost of living.

What affects inflation

The rise in prices is influenced by a whole range of factors, including the situation on world markets and the internal policy of the state. These are some of the causes of inflation.

Weather- in a bad year, farmers will reap a small harvest, and, as a result, the cost of food will increase.

Large military spending- all the money goes to military factories, and enterprises that produce civilian products are forced to reduce volumes.

Infrastructure development- a road was built between the two regions, competition increased, and entrepreneurs, adapting to new conditions, lowered prices.

Exchange rate fluctuations- because of this, prices rise from manufacturers purchasing raw materials and equipment abroad. Raw materials become more expensive - the cost and final price of the goods increase.

Rates- the price of most goods includes the cost of transportation by rail, payments for heat and electricity. Both railroad and energy companies usually have monopolies. As soon as they raise tariffs, it immediately affects the prices of almost all goods.

Economic forecasts- the Central Bank even uses a special term “inflationary expectations”. And these expectations can speed up or slow down inflation.

For example, if some expert declares on the main channel of the country that a sharp increase in prices is possible, then viewers will run to stores to buy goods for future use. Against the backdrop of rush demand, prices will rise. If producers expect high inflation, they will begin to raise the cost of their goods in advance. As a result, the very expectation of rising prices will become the reason for this growth.

The government regulates inflation by limiting the amount of money in the economy. This is what the Central Bank does. His main tool is the key bet. If the Central Bank lowers the key rate, banks can issue loans to people and entrepreneurs at a low interest rate, because the money is cheap for them. At the same time, deposit rates are falling - attracting deposits from citizens becomes unprofitable, because it is easier to borrow from the state.

As a result, the amount of money in the economy grows: everyone takes out cheap loans and actively spends their savings, since there is no point in putting them on deposits. Demand is growing, and so are prices. Inflation is rising.

To reduce inflation, the Central Bank, on the contrary, raises the key rate. Then banks borrow not from the state, but from the population, raising deposit rates. People stop spending and start saving. Interest rates on loans are rising. There is less money in the economy, inflation is decreasing.

Why does it seem that Rosstat is wrong

The average consumer, whose portrait Rosstat draws when collecting a grocery basket, is an abstract character. Each Russian family has its own unique basket, which does not coincide with the statistical one. For example, poor people spend most of their income on food, while food takes up only 37.5% of the official basket.

In addition, the inflation rate differs in different regions. For example, in November 2018, in the Bryansk region, prices, according to Rosstat, increased by 0.9%, and in the Yamalo-Nenets Okrug, on the contrary, decreased by 0.2%. In the country as a whole, the cost of the food basket increased by 0.5%. But we cannot ignore nationwide inflation: it is important for the state to understand what is happening to the economy as a whole and whether it is possible to regulate prices in the country.

VTsIOM polls show that over the past 14 years, more than half of Russians believe that the country has very high inflation. For example, in March 2018, according to the Central Bank, the majority of the population believed that inflation in Russia was 9.2%. According to official information, this figure was 2.35%. The Central Bank believes that this is happening because we are simply accustomed to living in a country with high inflation.

Who else thinks about inflation in Russia?

In addition to Rosstat, several other organizations consider price changes in domestic stores.

X5 Retail Group Together with Rosstat, it calculates the Pyaterochka index based on the prices of products in its retail network. The company monitors prices only for 33 goods included in the minimum set of Rosstat. The Pyaterochka index practically coincides with official inflation.

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 inflationary spiral 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.

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?

1. Exporters who sell their goods abroad receive foreign currency there, and national currency here. The benefit is obvious
2. Debtors who owe a fixed amount.
3. 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.
4. 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 primarily purchases 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 influencing 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!

Inflation concept

Definition 1

Inflation is an economic indicator accompanied by rising prices for products (services). In other words, over time, with the same amount of money, the population can buy fewer goods and services than before.

At the same time, the value of the national currency falls; almost all market segments suffer from these processes (rising food prices, decreasing purchasing power).

Example 1

As a result of an increase in gas prices, everything related to gas (transportation of products, gasoline) instantly becomes more expensive. If the dollar grows, then everything bought with this currency becomes more expensive.

World prices influence inflation and are of great importance.

Methods for calculating inflation

Inflation is an economic indicator. The general price level is calculated on the basis of a fixed set of consumer goods, taking into account the structure of their consumption. These indicators also include medium- and long-term goods and their services.

To calculate the inflation rate, 2 indicators are used:

• Inflation index,
• Inflation rate.

The inflation index or price growth rate (IP) is calculated using the value of consumer prices for goods in the reporting period (P1), divided by the value of consumer prices for goods in the base period (P0). The calculation is made using the formula:

The inflation index determines the amount by which the price level changes (how many times). If the index is greater than one, then prices rise, and if the index is equal to one, then the general price level is little mobile and remains at the same level. If the index is less than one, then the general price level decreases.

The inflation rate (P) is calculated using a formula in which the numerator indicates the absolute change in prices compared to the prices of the base period (as a percentage).

$P=(Qc-Qp)/Qp \cdot 100%$

Thus, the inflation index shows how many times the price level changes, and the inflation rate reflects the percentage by which the general price level changes.

These formulas are interrelated. If the inflation index is more than one, then prices are rising and the inflation rate is a positive value. If the inflation index is less than one, then the inflation rate is negative.

Summary inflation indicators

Note 1

For several centuries, economists have attempted to create accurate calculation methods that could be used to estimate not only the value of the market basket, but also its composition.

Statistician E. Laspeyres developed a method for indexing inflation using a formula showing the comparison of the consumer basket in accordance with the current and base periods and the difference between them.

$IL=(∑p1 \cdot q0)/(∑p0 \cdot q0)$

Reflecting price fluctuations in the base period, the index excluded changes in cost in the composition of consumption structure. For this reason, it gives a high estimate of inflation when prices rise and a low estimate when prices fall.

Using the Paasche index, the calculation of consumer spending for the current time compared to the base period is determined, with the same basket assortment.

$IP=(∑p1 \cdot q1)/(∑p0 \cdot q1)$

By calculating the Paasche index, you can see what changes are occurring: how many times the average price level increases (decreases). Having observed the movement of prices of the consumer basket, this formula cannot fully reflect the effect of income. The result is an overestimation of inflation when prices are reduced and an underestimation of inflation when prices rise.

Both indices have their own errors, so they were combined to find the average by scientist Fisher. To do this, the root of the product of both indices is calculated.

$IF=√(∑p1 \cdot q1)/(∑p0 \cdot q0)\cdot (∑p1 \cdot q1)/(∑p0 \cdot q1)$