Forex glossary
Inflation
A rise in the general price level over a specified period, measured relative to a stated base. Slower positive inflation still means rising prices, not falling prices; an index does not represent every household's costs equally.
Illustrative example
How does it work in practice?
Assume three hypothetical comparable readings of the same price index, one year apart: 100, 104 and 106.08 points. Inflation slows from 4% to 2%, but the price level still rises; slower growth is not a fall in prices.
A case to work through
Slower, but more expensive
A fictional price index is 120 with annual inflation of 1% in the next period.
- Calculate 120 × 1.01 = 121.2.
- The rate is low, but the new level exceeds 120.
What follows? Separate the rate's change from the price level's change.
Example boundary: This does not describe every product or household's prices.
Rate versus price level
Text description of the diagram
- Starting level: Hypothetical index: 120.
- Positive inflation: Assumed 1% over a comparable year.
- New level: 120 × 1.01 = 121.2.
A useful distinction
Inflation / Consumer Price Index (CPI)
Inflation describes price growth; CPI is a particular price measure.
Check your understanding
Convert positive inflation into a new index level.
Show the answer and explanation
204
200 × 1.02 equals 204.
Publication, units and interpretation
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Related terms
Sources and documentation
- Personal Consumption Expenditures Price Index – BEA
Describes PCE price coverage and distinct monthly and annual observations.
Document read: - Consumer Price Index Frequently Asked Questions – BLS
Distinguishes CPI index levels, percentage changes, periods and vintages.
Document read:
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