The price level is a weighted average of the prices of goods and services in the economy as measured by the consumer price index. It can increase, decrease or remain constant. Inflation is a manifestation of economic disequilibrium and is characterised by a steady rise in the price level, while its decline is referred to as deflation. The opposite of accelerating inflation is disinflation, which is characterised by a decline in the rate of growth of the general price level.
How is the price level measured?
Price indices are used to measure the price level. The best known is the Consumer Price Index (CPI), followed by the Producer Price Index (PPI), the Implicit Price Deflator (IPD), the Construction Price Index and the Agricultural Price Index. What are the different indices used for?
- The CPI is used for the purposes of indexation of wages, pensions and social income, also in connection with lease and other contracts, where provision is made for the revision of the originally established benefit on the basis of inflation.
- The IPD is used to eliminate price changes and is represented by a fraction where the numerator is nominal GDP at current prices and the denominator is real GDP at constant prices.
- The PPI comprises several indices that track price developments in different sectors of the economy. The most common are the Construction Work Index, the Agricultural Producer Price Index, the Industrial Producer Price Index and the Market Services Price Index.
Did you know that the price level is directly proportional to the amount of money in circulation and the rate of turnover, and indirectly depends on the size of the product?