How to measure inflation
Rate of inflation is measured by calculating the percentage price increase in goods and services over a period of time.
Inflation is measured through a Price Index. The economists monitor the price changes of a collection of goods & services over a period of time. Price index consists of
A basket of goods
It contains goods and services from various sectors of the economy. There prices are monitored over a period of time.
Base year
This is the first year with which the prices of subsequent years are compared. The price of each commodity is given the value of 100. The base year chosen is a typical year in the sense that there is neither very low or very high inflation, nor any extraordinary occurrences like wars.
Weights
Some commodities are more important in the economy as compared to other commodities. To find out the true effect of inflation. Weights are added to different products and services according to their importance in the society. A product which has a more serious affect is given a higher weight. For example food products which form a staple diet of the society are assigned more weightage than luxury products (perfumes). As the pattern of consumers spending changes over time so the Price Index will have to change the weights assigned to different commodities.
