In this post, we continued on how inflation is measured and what its causes are highlighting a few examples to enable you understand it better.
Let’s get into it…
How Is Inflation Measured?
The government has a couple of different methods for calculating the current inflation rate but the main one commonly used in most countries including Nigeria is the Consumer Price Index. Consumer Price Index – This is produced by the Bureau of Labor Statistics (BLS), it is the most widely used measure of inflation. The primary CPI (CPI-U) is designed to measure price changes faced by urban consumers.
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
Mathematically, it is represented as CPI_t={C_t}/{C_0} * 100
Where; CPI_t = consumer price index in current period.
C_t = cost of market basket in current period.
C_0 = cost of market basket in base period .
Read here to learn more about CPI and other methods.
Causes of Inflation
Different factors can cause inflation but we can classify them into two different categories: Cost-push inflation and demand-pull inflation.
In the event of cost-push inflation, prices go up by the rising costs to provide the goods and services. A supply shortage is caused by this but the demand for the goods and services a not decreased.
While cost-push deals with shrinking supplies unable to reach the average level of demand, Demand-pull inflation is when the demand fires up, and the price goes up so that companies can attempt to make enough supplies to meet that demand. In other words, demand-pull inflation can be a potential sign of a thriving economy. This means that people have money want to purchase goods so badly that they have to raise prices not to cover costs in a stagnant market, but to enable more people afford a popular product.
Demand-pull can happen as a result of high employment and this simply means that people have more disposable income.
Inflation has a couple of effects and control measures that can be adopted however it is important that in every economy, the government takes charge of inflation early enough so that it does not affect the citizens and the country negatively.
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Read also – How Inflation can affect you and make you poorer.
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