What is inflation?

How is inflation is calculated? What impact does inflation have on consumer spending?

• Answer:

  Using either a single good or a weighted average basket of goods, the inflation rate is calculated as: current period prices / prior period prices= price deflator. If you subtract 1 from both sides, you get the inflation rate. For example, 110/100 - 1 = 10%. so prices are 10% higher in the current period. the most ubiquitous proxy used in the US is the CPI or Consumer Price Index. This is a weighted average basket of goods that represents the consuption of a "typical" urban resident. How does inflation affect consumer spending? If inflation is high, then consumers spend all of their income as fast as possible because they know inflation will erode their purchasing power. if inflation is low or their is deflation, consumers will delay their purchases because they anticipate an increase in their purchasing power.