Inflation

A change in the purchasing power of money, observed as a broad rise in prices rather than a rise in any one of them. A statistics agency prices a fixed basket of goods and services weighted to represent household spending, publishes the total as an index, and the rate of inflation is the change in that index between two dates. A headline reading covers the whole basket. A core reading removes food and energy, on the reasoning that those two move for reasons that say little about underlying pressure.

The annual rate is this month's index level divided by the level twelve months earlier, less one. That construction has a consequence worth holding on to: the rate falls when a large increase from a year ago drops out of the comparison, even if prices this month were unchanged, an arithmetic effect known as a base effect. A monthly rate avoids it but is noisier and is normally seasonally adjusted before publication.

Falling inflation is the misreading to watch for. A lower rate means prices are still rising, only more slowly, and prices falling outright is deflation, a different condition with different consequences. Economists also disagree at length about which measure to look at, since the consumer price index, the producer price index and the deflator preferred by some central banks give different answers for the same economy, and about whether basket methods overstate or understate the true change in the cost of living. Market prices move on the gap between a release and the consensus that preceded it, transmitted through what the reading implies for the policy rate.