Readers Question: Would it be possible for a nation to claim that is reducing inflation rate successfully through economic measures, however at same time is allowing increase of commodities prices such as bread, meat, and etc…
Firstly a fall in the inflation rate, means prices are still rising. Just at a slower rate.
For example in late 2008, the UK inflation rate was falling from 5% to 2%. Prices were still rising at the start of 2009.
Two useful definitions
- Headline inflation rate – measures the overall cost of living. In the UK, the headline rate is measured by the CPI
- Core inflation rate – this measures the inflation rate, excluding volatile factors, such as raw materials (oil and food)
Inflation measures the average cost of living. Therefore, it is possible for some goods to be increasing in price by a greater amount than the average price level.
A common example, is petrol prices rising at 10%, when the headline inflation rate is 4%. If we stripped away petrol from the inflation index, we would get an underlying inflation rate of 3%.
Rising oil prices were a major factor in causing the UK inflation of 5% in 2008.
At the present moment, the fall in oil prices are causing the headline inflation rate to be lower than it would be otherwise. Headline inflation is running at 1% in many European countries, but without the downward pressure from oil, headline inflation may be closer to 2%.
An example of core inflation being more stable than headline inflation
Source: [1. Paul Krugman, New York Times: Core Logic, Still ]
This graph shows that headline inflation is more stable. However, if we exclude energy and food, we had inflation go over 5% and also slip into deflation in 2009.
Food prices often change at a greater rate than overall inflation. Food prices tend to be more volatile because they are determined by factors, such as the weather. Also, with inelastic supply and demand, this makes prices more volatile. Continue Reading →