OpenStax Principles of Economics - Ch. 22 Key Terms: Inflation

adjustable-rate mortgage (ARM)

a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates

base year

An arbitrary year is chosen as the base year with an index number of 100. Inflation can be measured by comparing the index number of other years to the base year.

basket of goods and services

a hypothetical group of different items, with specified quantities of each one meant to represent a "typical" set of consumer purchases, used as a basis for calculating how the price level changes over time

Consumer Price Index (CPI)

a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases

core inflation index

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

cost-of-living adjustments (COLAs)

a contractual provision that wage increases will keep up with inflation

deflation

negative inflation; most prices in the economy are falling

Employment Cost Index

a measure of inflation based on wages paid in the labor market

GDP deflator

a measure of inflation based on the prices of all the GDP components

hyperinflation

an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

index number

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

indexed

a price, wage, or interest rate is adjusted automatically for inflation

inflation

a general and ongoing rise in price levels in an economy

International Price Index

a measure of inflation based on the prices of merchandise that is exported or imported

Producer Price Index (PPI)

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

quality/new goods bias

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

substitution bias

A fixed basket inflation rate that often overstates the cost of living increase since it doesn’t account for consumers substituting cheaper alternatives when prices rise.