Inflation, referred to as "inflation" in English, refers to an increase in overall prices and a decrease in the purchasing power of the currency held by people, that is, an economic phenomenon in which the same unit of currency can purchase fewer goods or services. Inflation rate, also known as Inflation Rate in English, is used to measure the speed of inflation change, or the speed of decline in currency purchasing power. Through the inflation rate, the degree of inflation can be intuitively judged. Inflation is an indicator often used when measuring a country's economic development. A healthy inflation can indicate that the country's economic status is in a stable rising stage, while excessive inflation will reduce people's spending power, thereby affecting a series of economic conditions such as productivity. The inflation rate in the United States in March 2023 increased by 5% year-on-year. Although it has declined from 9.1% in June 2022, it is still at a high level. The inflation rate of 9.1% in June 2022 was the highest since 1981. Data source So, what does the 9.1% inflation rate mean to ordinary working-class people, and how is the inflation rate calculated? What is the CPI that people often discuss? Inflation literally means "increase in the amount of currency in circulation" and refers to an increase in the overall price level in social life, including an increase in the average price level of goods and services, and a decrease in the purchasing power of the currency held by people, that is, an economic phenomenon in which the same unit of currency can purchase fewer goods or services. If the central bank (the Federal Reserve in the United States or the People's Bank of China in China) increases the issuance of currency in circulation, the amount of money flowing in the market will increase. When the number of goods on the market does not increase simultaneously, there will be insufficient supply, which will cause prices to rise and the purchasing power of equivalent currency to decrease. When this situation continues, it is called inflation. Ray Dalio, the founder of Bridgewater Associates, once proposed the price formula: Commodity price = currency circulation/commodity quantity Therefore, once the central bank's currency issuance increases significantly, it will cause inflation and thus currency depreciation. Starting from Greenspan, the United States adopted the so-called Quantitative Easing (QE) policy to stimulate the economy and inject a large amount of money into the market in a short period of time. As of April 2022, the assets and liabilities of the U.S. central bank have reached nearly 9 trillion US dollars. The intuitive feeling in real life can be taken as an example of coffee. For example, twenty years ago, a cup of coffee only cost $0.80. Ten years ago, a cup of coffee cost $1.25. Now, a cup of coffee costs $1.95. The price of the same cup of coffee rose from $0.80 to $1.95 in 20 years. Three situations that lead to inflation The fundamental cause of inflation is the increase in currency issuance, which may lead to three situations, ultimately leading to rising prices: Demand-Pull The additional issuance of money will lead to an increase in the overall market demand for goods or services. When this increase is greater than the increase in production capacity, it will lead to an imbalance in the relationship between supply and demand, because the increase in demand will drive up the price level. Cost-Push When the additional issuance of currency causes the cost of goods or services to increase, it will also lead to an increase in the price of the entire supply chain of goods or services. For example, after the additional issuance of currency causes a boom in the oil development industry, leading to an increase in oil prices, then a series of production costs and prices using oil as raw materials will increase, ultimately leading to an increase in consumer prices. Built-in Inflation Intrinsic inflation is usually related to people's adaptive expectation mentality when inflation occurs, that is, people expect that the current inflation will continue in the future, so people require continued wage increases to cope with rising prices, and increased wages will further cause price increases, forming a cyclical impact within a certain period of time. How to assess inflation?
When judging and calculating inflation, the Consumer Price Index (CPI) is most commonly used. The Wholesale Price Index (WPI) or the Producer Price Index (PPI) are also used. Consumer Price Index (CPI) This is one of the most commonly used indicators. It judges and measures the price level and inflation level in the current economic environment by directly comparing the prices when consumers shop in different periods. Wholesale Price Index (WPI) The degree of inflation is measured by measuring changes in commodity prices at various stages before sales. According to different national economic policies, it mainly includes manufacturers, wholesalers, etc. For example, for cotton, prices including cotton raw materials, cotton yarn, cotton husks and cotton clothing are used. Producer Price Index (PPI) It is a price index used by some countries, including the United States. It is a price index that uses the amount of money obtained by the seller to analyze the degree of inflation from the cost side. What is CPI? How is CPI calculated? CPI, the full name of Consumer Price Index, is an indicator that reflects the price changes of goods and services related to people's lives, and is analyzed in the form of percentages. The main function of CPI is to evaluate the extent of inflation. CPI is the most important indicator to measure inflation. By comparing the calculated CPI value with the benchmark value, the inflation rate during this period can be calculated. An excessively high CPI growth rate indicates that inflation has caused instability in the economic environment, and timely adjustments to monetary and fiscal policies are needed to stabilize the social and economic situation. The prices calculated by CPI usually include various areas of people's livelihood such as food, transportation, housing and clothing. The formula for calculating CPI is CPI = Cost of an item or service in a given year / Cost of an item or service in a base year = Cost of Market Basket in Given Year / Cost of Market Basket in Base Year ×100% The conventional CPI calculation process is: Collect prices for corresponding product or service collections for a specified year; Collect prices for the corresponding product or service collection for the base year; The price of a product or service set at two points in time is added together to obtain the sum; Divide the sum of prices in a given year by the sum of prices in the base year; Multiply the calculated result by 100%; The following is an example of calculating the CPI change of pasta products sold in the United States from 2020 to 2022: The prices of pasta and pasta sauce in the base year and in 2022 are: vintage pasta prices pasta sauce prices base year $0.8 $1 2020 $3 $4 According to the above calculation steps: The sales unit prices of the two products in the base year are $0.8 and $1, so the total price of the two products is $0.8 + $1 = $1.8 The sales unit prices of the two products in 2020 are $3 and $4, so the total price of the two products is $3 + $4 = $7; Cost of goods or services in designated year 2020 / Cost of goods or services in base year = $7 / $1.8 = 3.9 Therefore, 2020 CPI = 3.9 x 100% = 390% During calculation: Depending on the selected date, monthly CPI analysis, quarterly CPI analysis, annual CPI analysis, etc. can be performed; What is the inflation rate? Inflation rate, also known as Inflation rate in English, refers to the rate of increase in prices or the rate of decline in the purchasing power of money under inflation. The degree of inflation can be intuitively judged through the value of the inflation rate.
The higher the inflation rate, it means that prices are rising too fast and the purchasing power of money is declining. People's spending power will be greatly affected, which may cause economic growth to stagnate or even reverse. Therefore, the government usually controls the country's inflation rate within a smaller range to stabilize the country's economic development process. When calculating the inflation rate, you can use the starting price (Starting Cost) and the ending cost (Ending Cost) within a period of time to calculate: Inflation Rate = (Ending Cost – Starting Cost) / Starting Cost × 100% When using CPI to calculate the inflation rate, you need to determine the starting CPI (Starting CPI) and the ending CPI (ending CPI) within a period of time, and then calculate it according to the following formula: Inflation Rate = (Ending CPI – Starting CPI) / Starting CPI ×100% The following is an example of purchasing the same pair of sneakers in different years, and calculating the inflation rate through CPI: 2021 $3.5 $4.2 2022 $5 Use CPI to calculate the inflation rate from 2020 to 2021 and 2021 to 2022: CPI in 2020 = (3+4) – (0.8+1)/(0.8+1) = 288.9% CPI in 2021 = (3.5+4.2) – (0.8+1)/(0.8+1) = 327.8% CPI in 2022 = (4+5)-(0.8+1)/(0.8+1) = 400% Use the CPI to calculate the inflation rate: Inflation Rate = (Previous Year CPI – Current Year CPI) / starting CPI ×100% Inflation rate from 2020 to 2021: (327.8% – 288.9%)/288.9% = 13.5% Inflation rate from 2020 to 2021: (400% – 327.8%)/327.8% = 22% The following is the 20-year CPI change data (12-month change) in the United States. According to the CPI report released by the U.S. Bureau of Labor Statistics on April 12, the overall CPI in the United States increased by 8.5% year-on-year in March, which was the highest monthly increase since December 1981. The main reason for this situation is the Federal Reserve's large-scale purchases of US Treasury bonds and MBS (Mortgage-Backed Securities). Of course, other reasons include the Russia-Ukraine war. The rise in oil prices and food prices caused by the Russia-Ukraine war directly led to the rise in CPI. Data source: U.S. Department of Labor What does an 8.5% inflation rate mean? Ordinary people's biggest intuitive feeling about the inflation rate is that things are much more expensive. However, if you use an investment perspective to explain the 8.5% inflation rate, you will be shocked. Taking US$100,000 as an example, if inflation of 8.5% continues for five years, the purchasing power of US$100,000 is only worth US$66,000, and the depreciation rate reaches 34%. If inflation of 8.5% continues for 8 years, the purchasing power of US$100,000 will only be worth 51,000 yuan, and the depreciation rate will reach 49%. If inflation of 8.5% continues for 10 years, the purchasing power of US$100,000 will only be worth 43,000 yuan, and the depreciation rate will reach 57%. The table below shows the currency's depreciation percentage each year. Yearly amount depreciation rate Principal $100000 Year 1 $92479 8% Year 2 $84917 16% Year 3 $77974 23% 4th year $71598 29% 5th year $65744 35% 6th year $60368 40% 7th year $55432 45% 8th year
$50900 49% Year 9 $46738 54% Year 10 $42916 57% How is the U.S. CPI calculated? The U.S. CPI is calculated by the Bureau of Labor Statistics (BLS) It is released once a month. The earliest CPI value was calculated in 1913. In subsequent developments, the average CPI value of 100% from 1982 to 1984 is used as the evaluation standard for subsequent CPI values. For example, when the CPI value is 100%, it means that the average price increase of specific goods and services in this year remains at the same level as in 1984. If the CPI value is 125%, it means that the inflation level has increased by 25%. 1. Product categories included in CPI The commodities covered by the U.S. CPI mainly include food and beverages, energy, housing expenses, clothing, transportation, health care, entertainment, education and other/services. At different times, the category breakdown may be adjusted: Products mainly included in the product categories food and beverage Breakfast cereal, milk, coffee, chicken, wine, snacks, etc. energy Oil, gasoline, natural gas, etc. housing expenses House rent, property fees, fuel, bedroom furniture, etc. clothing Men's shirts and sweaters, women's dresses, jewelry and more Transportation Brand new cars, air tickets, gas, motor vehicle insurance and more healthcare Prescription drugs and medical supplies, physician services, eyeglasses and eye care, hospital services, and more entertainment TVs, toys, pets and pet supplies, sports equipment, show tickets and more education College tuition, postage, phone services, computer software and accessories, and more Others/services Tobacco and smoking products, haircuts and other personal services, funeral expenses, etc. At the same time, CPI data collection also includes sales tax, consumption tax, and government fees including water and sewage treatment fees, car registration fees, and vehicle tolls, but does not include income tax and investment fees, such as stocks, bonds, etc. 2. What types of CPI are there in the United States? CPI-W and CPI-U In the past, CPI data collection in the United States was divided into consumer price index (CPI-W) data collection for urban wage earners and clerical workers (CPI-W) and consumer price index (CPI-U) data collection for all urban consumers (All Urban Consumers). CPI-W mainly includes consumer units composed of clerical personnel, sales personnel, craftsmen, operators, service personnel or laborers. These personnel represent at least 28% of the country's population. In January of each year, social security recipients will receive a "Cost of Living Adjustment (COLA)" adjusted based on CPI-W to ensure that the social security and supplementary security income benefits received are sufficient to cope with inflation. CPI-U is a CPI that includes all urban consumers, including professionals, self-employed people, people living below the poverty line, the unemployed, retirees, urban working-class people, and clerical workers. It accounted for 88% of the U.S. population at that time, and is more representative of the general public than CPI-W. With the development of society, BLS has reformed the calculation of CPI and merged the data collection process for CPI-W and CPI-U. CPI-W will use data information from CPI-U. Core CPI Core CPI has also become the core CPI, which is a CPI calculation value that excludes food and energy commodities, including oil and gasoline. Because these two are constantly traded in the market, they are non-disposable and irreplaceable commodity types, and the price fluctuations are relatively violent and non-systematic. Therefore, they cannot accurately reflect the overall price changes in the market. After excluding the prices of these two types of commodities, a relatively stable and reference value CPI value can be obtained. CPI-E
CPI-E stands for CPI for the Elderly, which means CPI for the elderly. As for the collection and analysis of consumption data for the elderly group over 62 years old, there are about 24% of people in the United States who meet this condition. In the consumption distribution of this group of people, the proportion of consumption in the health care category is about twice that of all consumers in CPI-U or the employee category in CPI-W, so it is a more targeted CPI data type. 3. Calculation process of US CPI Step 1: Data collection Before each calculation of CPI, the U.S. Bureau of Labor Statistics will look at the self-reported expenditure data of households and individual consumers within two years, but there will be a certain gap in time. For example, to calculate CPI data in 2021, it will look at the data collected in 2018 and 2019 to determine the categories of goods that need to collect data. Then we will collect commodity prices in different cities through different methods, such as telephone sampling, on-site inquiries, etc. Step 2: Calculate CPI values for different categories Using the prices of corresponding commodities collected in the eight categories, the CPI values of different categories are calculated according to the CPI calculation formula. Step 3: Weighted calculation to obtain the total CPI value In different periods, the proportion of different consumer goods or services in total consumption will be different. Based on the proportion data formulated for that year, the calculated CPI values of different categories are used to perform weighted calculations to obtain the total CPI value. The following is a weighted table for February CPI released by the U.S. Bureau of Labor Statistics: Product category weight 13.4% Energy (including gasoline) 7.5% Goods (including drugs and cars) 21.8% 32.7% 6.9% 5.6% Other expenses 12.1% all 100% Source: U.S. Labor Statistics In the calculation, different starting numbers will be used according to the period being analyzed. The monthly CPI will be calculated using the value at the end of the current month and the value at the end of the previous month. The annual CPI will be calculated using the value of the current year and the value of last year. For example, the latest data report released by the U.S. Bureau of Labor Statistics shows that the CPI in March increased by 8.5% year-on-year, that is, calculated for the monthly CPI, and the core CPI rose by 6.5% on a 12-month basis, that is, calculated for the annual CPI. 4. Release frequency in different cities Because each autonomous state in the United States has a high degree of autonomy, in addition to the monthly national CPI data report on the U.S. Bureau of Labor Statistics website, different urban areas will publish their own local CPI data. Once a month in the following urban areas Chicago-Gary-Kenosha California - Los Angeles - Riverside - Orange County New York-Northern New Jersey-Long Island The following city areas are published every even-numbered month atlanta Michigan-Detroit-Ann Arbor-Flint Texas-Houston-Galveston-Brazoria Florida - Miami - Fort Lauderdale Philadelphia-Wilmington-Atlantic City California-San Francisco-Oakland-San Jose Washington - Seattle - Tacoma - Bremerton The following city areas are published every odd-numbered month Boston-Brockton-Nashua Ohio-Cleveland-Akron Texas-Dallas-Fort Worth Washington-Baltimore How is China's CPI calculated? What categories are there? The CPI in mainland China mainly covers eight categories of products, including food, tobacco, alcohol and supplies, clothing, household equipment, medical care, transportation and communications, entertainment, education and culture, and residence. There are at least 6,000 commodities in 262 sub-categories, covering all consumption content of urban and rural residents. The sampling quantity ratio will be adjusted according to the size differences of different cities. For example, first-tier cities survey more types of commodities than second-tier cities.
When collecting data, data will be collected randomly and equidistantly from high to low based on the enterprise directory obtained from past economic censuses and the administrative records of relevant departments based on retail sales or business scale. At the same time, a reasonable regional distribution will be carried out following the principle of taking into account various businesses and various scales. Data collection personnel are required to collect under the principle of "fixed people, fixed points, and fixed times" to collect the most authentic and comparable data information. After the data collection is completed, the CPI values are calculated according to different categories, and then the total value is calculated based on the weight ratio of different categories. The weight ratio in China's CPI is mainly determined based on the detailed proportion of consumption expenditures of various goods and services by 130,000 urban and rural households across the country. The values can be found in the relevant yearbooks publicly edited and published by the National Bureau of Statistics of China. The current system stipulates that the weight ratio in the CPI is adjusted every five years. The National Bureau of Statistics of China releases the CPI on a monthly basis, generally around the 13th of each month, and on a quarterly and annual basis, it is extended to around the 20th of each month. The published contents mainly include: CPI of the country and each province (autonomous region, municipality); CPI of 36 large and medium-sized cities; The monthly released data includes the total index, major category indexes and some medium-category indexes, such as data analysis of grain prices, oil prices, meat, poultry and product prices, fresh egg prices, aquatic product prices, fresh vegetable prices, fresh fruit prices, condiment prices, etc. in the food category. What impact does inflation have on economic life? The impact of inflation on economic life will have different effects on different groups of people: 1. Reverse influence For ordinary consumers, inflation means an increase in the cost of living, so most ordinary consumers do not support inflation. Individuals or businesses that hold currency-denominated assets, such as cash, savings accounts, bonds, etc., will see their assets lose value due to inflation. For importers, inflation may result in paying more than originally when paying for imported goods. For the government, excessive inflation means that there is a serious situation in the economic environment, which requires intervention and regulation as soon as possible to avoid adverse effects such as economic stagnation or even regression. 2. Positive impact For individuals or businesses that own tangible assets, such as real estate, inventory, etc., inflation will increase the price of the assets they own, so inflation is beneficial to them. For exporters, when inflation causes currency devaluation, exporters can gain more benefits when they use foreign currencies to trade. For borrowers, the reduction in the value of money due to inflation is reflected in a decrease in the value of the borrowed money that needs to be repaid. For the government, stabilizing small amounts of inflation is beneficial. It can encourage consumers to buy more goods, promote the development of enterprises, increase employment opportunities, improve workers' productivity, and stimulate overall economic growth. What is stagflation? What is the difference and connection with inflation? Stagflation, the full name is "stagnant inflation", English is Stagflation, which is a combination of Stagnation and Inflation. In economics, especially macroeconomics, stagflation specifically refers to the abnormal economic phenomenon in which economic stagnation, inflation and high unemployment coexist at the same time. Economists generally believe that the two fundamental causes of stagflation are supply shocks and wrong fiscal/monetary policies. Among them, supply shock refers to changes in productivity, costs, etc. caused by emergencies under some special circumstances. For example, when a large-scale epidemic breaks out, it leads to a serious reduction in the number of people working, an increase in unemployment, delays in medical services, and a shortage of engineering raw materials, leading to rising costs, which in turn causes rising prices, which together lead to economic stagnation. In the 1970s, the United States experienced a period of severe stagflation. After the end of World War II, the United States entered a period of economic prosperity. However, in the late 1960s, this prosperity began to fade. In the face of fierce international competition and the investment of large amounts of money into the Vietnam War, manufacturing jobs in the United States began to decrease, and the economic environment began to see rising unemployment and inflation.
In 1970, then-US President Richard Nixon promulgated a series of measures, such as freezing wages and prices for 90 days, increasing import tariffs by 10%, removing the United States from the gold standard, etc. These series of "Nixon shocks" were originally intended to stimulate the economy and increase employment opportunities. Alleviating inflation, but the result is that the United States has entered the stagflation stage. The Federal Reserve hopes to use monetary policy to combat stagflation, but the result is that stagflation has further intensified. Constantly changing policies have made businesses and individuals feel uneasy, and irrational shopping has increased the degree of inflation. Externally, OPEC, the international oil exporting organization, announced an oil embargo on the United States starting in 1973, which directly led to a spike in costs, prices, and unemployment. Faced with internal and external attacks, the United States entered a period of stagflation and experienced the most severe economic recession in history from 1981 to 1982. The similarities and differences between stagflation and inflation The similarity between stagflation and inflation is that they both cause price increases, and if there is no timely intervention when inflation is severe, economic development will stagnate. The most obvious difference between stagflation and inflation is that in inflation, although prices rise, people's wage income will also rise accordingly, but in stagflation, because the unemployment rate rises, while prices rise, people's average income shows a downward trend. Another difference is that a small amount of inflation is beneficial to economic development, stimulating consumption, increasing employment rates, increasing the labor force, etc. However, regardless of the magnitude, stagflation has a negative impact on society.