Inflation; Types and measures

 Inflation is a term used in Economics which is used to measure the rise in general level of prices for a bunch of goods and services over a period of time.When the price of a commodity or service increases the purchasing power of currency decreases.It results in the loss of value of money.Then each unit of currency can buy only fewer goods and services.
 Inflation can affect the economy of a country, positive and negative, in various ways.Economic experts are of the view that higher inflation is caused by the excessive growth of the money supply.
 If inflation gets totally out of control it affects the normal workings of the economy.This is called hyper inflation. Hyperinflation can lead to the abandonment of the use of the country's currency.
 There are two types of inflation
1. Demand Pull inflation- When there are less goods and more buyers, the demand increases.If the supply can not expand to meet the demand inflation occurs.This type of inflation is called demand Pull inflation.
2. Cost Push Inflation- Due to rise in input costs such as rapid wage increases,increase in corporate taxes and rise in imported raw material prices due to weak currencies the cost push inflation occurs.
 Inflation Rate
The inflation rate is the percentage rate of change of the overall price level of an economy over time.
 Measures of Inflation
  Inflation is usually estimated by calculating the inflation rate of a price index. usually Consumer Price Index or Wholesale price Index (WPI) is used to measure Inflation. In addition to this there are seven other important measures.producer price index (PPI), personal consumption expenditure (PCE) deflator, and gross domestic product (GDP) deflator, and a core version of each, which excludes food and energy.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures the prices of a bunch of goods and services purchased by a 'typical consumer'. In other words, the Consumer Price Index measures the changes in the cost of living.Some economists are of the view that the CPI overestimates true inflation by up to 1 per cent.
Producer Price Index (PPI)
The producer price index (PPI) measures the average change in the selling prices received by domestic producers to consumers and other businesses.Several products are sold to other businesses rather than consumers.So it differs from the CPI. producer price index measures both changes in revenue and changes in output.
Personal Consumption Expenditure (PCE) Deflator
The Personal Consumption Expenditure (PCE) measures the average change of price paid for all domestic purchases by all consumers.It measures the actual and imputed expenditures of households which also includes data pertaining to durable and non-durable goods and services.PCE deflator is also known as the PCE price index (PCEPI), 'PCE price deflator', and the 'Implicit Price Deflator'.
 The Personal Consumption Expenditure (PCE) is a volatile measure. Core PCE (CPCE) price index is less volatile than PCE Deflator which excludes the seasonal food and energy prices.
GDP Deflator
 In Ecocomics, the gross domestic product (GDP) deflator is used to measure the average change over time in the level of prices of all new, domestically produced, final goods and services.
It is calculated by using the following formula

GDP Deflator= Nominal GDP/Real GDP*100

Core Indexes
In addition to cite inflation numbers the economists usually refer to the Core version of that index.The core version excludes some volatile data.For example, In calculation of PCE the economist uses the oil and energy prices.But in Core PCE they exclude food and energy prices.