The index of inflation is an economic indicator which reflects dynamics of the prices of the goods and services paid with the population of the country that is of products which is gained for direct use, but not the subsequent overproduction. This size is also called consumer price index and is one of the indicators serving for measurement of the average level of the prices of goods of a consumer basket for a certain period.
Instruction
1. For calculation of the index of inflation the formula is used: ITs_l = ∑ (P_1*Q_0) / ∑ (P_0*Q_0) where Q_0 is quantity of the goods and services released for the basic period of calculation (usually - year); P_0 are goods prices and services of the base year; P_1 are the prices of the current period. The index of inflation – percentage size therefore after calculation of this fraction the total number is multiplied by 100%.
2. The given formula is application of the Laspeyresa method which consists in comparison of the prices of two temporary periods on the identical volume of the basic period. This way of calculation reflects dynamics of cost of a consumer basket from a basic state by a present situation of time.
3. However the Laspeyresa method has also essential shortcomings, namely changes of structure of consumption are not considered. It reflects only change of level of profitability, but does not take substitution effect at which the price of some goods falls that leads to increase in demand into account. Thus, this way of calculation gives the overestimated value of the index of inflation.
4. Other method of calculation is based on a formula Paashe and consists in comparison of the prices of two periods already on consumption volumes in flowing the period, namely: ITs_p = ∑ (P_1*Q_1) / ∑ (P_0*Q_1). However this way also has a shortcoming – it does not reflect the level of profitability and does not consider the change in price. Thus, in case of reduction of prices of some products or services the index of inflation yields the overestimated result. And, on the contrary, at their increase, the underestimated assessment.
5. Application of a formula of Fischer which consists in calculation of average geometrical value of two provided indexes will be ideal option for finding of the index of inflation. Such formula is called ideal as it compensates shortcomings of two other ways: ITs_f = √ (ITs_l*ITs_p) = √ (∑ (P_1*Q_0) / ∑ (P_0*Q_0) * ∑ (P_1*Q_1) / ∑ (P_0*Q_1)).
6. However, despite ideality of a method of Fischer, economists of the different countries prefer the choice of one of the first two ways. In particular, in the international reporting use the Laspeyresa method as it takes cognizance that some goods can drop out of the use by a present situation for some reasons at all, including during the economic crisis.