There are several methods of estimating the rate of inflation.
A basket of commodities and services that are frequently used by households is used to create the Consumer Price Index (CPI), which tracks changes in price.
Food, clothes, shelter, transportation, and medical care are all included in this basket. The Bureau of Labor Statistics (BLS) is responsible for calculating the CPI in the United States.
The CPI is calculated by taking the price of each item in the basket and multiplying it by its weight.
The weight of each item is determined by its share of total household expenditures.
For example, if housing makes up 30% of household expenditures, then the weight of housing in the CPI would be 0.3. The prices of all items in the basket are then added up to get the total cost of the basket.
The CPI is computed by dividing the current year’s total basket cost by the base year’s total basket cost and multiplying by 100.
Another method of estimating inflation is the Producer Price Index (PPI).
This index is used to track inflation in the early stages of the production process. The PPI is also used to estimate the impact of inflation on businesses.