First, you can define a "basket" of goods, and measure how the total cost of buying the basket changes over time. Here, the inflation rate is simply the percentage rate of change of the sum total to buy the basket. This is used for Consumer Price Index, Producer Price Index, and a range of others.

A limitation here is that this approach will always only represent the change in prices of the representative items in the basket. So the Second way is to take the value of a set of transactions, such as GDP, and measure what would have been the value if the prices had not changed. This gives the so-called "Real" GDP. The ratio of actual GDP to "real" GDP gives the index, called a "deflator", and the rate of inflation is the percentage change in the deflator.

This still has the problem what to do with goods that appeared in one year and where not present previously, either because they did not exist, or because they represent a qualitative improvement. At one time, the US used a base set of prices that was fixed for a decade or more, so there was a series of deflators "indexed to 1982", for example, if the prices were from 1982.

But while a personal computer from 1982 can, with sufficiently clever programming, connect to the internet, it does not have the processing power or memory to run, for example YouTube clips of claymation political satire. And so there has been a move from a fixed index to comparing each year to the previous year, which is called a "chain index".

More critical for the US is that the Fed focuses on the s0-called "base" inflation rate, excluding prices of goods that have historically had more price volatility than inflation over time ... like food and gasoline. However, if in fact we have entered a period of a long term rising trend in energy prices, this is no longer warranted.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.