Inflation / Consumer price index

Inflation is an index summarizing the increase in consumer prices. By default, it shows the percentage increase in the price level of the average consumer's consumer basket over the past year, but there are other important inflation indicators as well.

The importance of inflation (consumer price index) is that it shows how the value of our money actually changes. Knowing this is one of the most important factors, whether we are examining the results of a company, the return on investments, or simply the evolution of our wages. 

The basis of the consumer price index is a consumer basket, which describes what people usually buy. It includes our daily bread, vegetables, meat, our mobile phone tariff, our electricity bill, gas, haircuts, and even the fact that we buy a winter coat every two years. 

But people's shopping baskets are different. There are people who don't drive a car, so the increase in the price of gasoline leaves them pretty much cold, but the indicator still includes this. There is no true average consumer, so essentially anyone can feel that their income has grown faster or slower than inflation. 

Inflation is nevertheless a fundamental benchmark, which is calculated for each country and to which many other data are compared. The advantage is that it is calculated on the basis of uniform standards, i.e. it means essentially the same thing everywhere in the world, and this is a very important factor in the case of a benchmark number. 

That's why we compare the investments yield, the interest rates and incomes everywhere to inflation and we are talking about real returns, real interest rates, respectively about real wages. In a real sense, the value of our investment, bank deposit and salary does not change if it grows at the same rate as inflation, since next year we can buy exactly the same amount of products for it as last year. If our investment, deposit or salary increases more than this, it increases in real terms, if less, it decreases.

Some groups of people and businesses also have their own consumption structure, which is not reflected in the consumer price index. If our suppliers bring the bulk of raw materials to our company, then we are affected by inflation for raw materials on the cost side. If we mainly need services to continue our activities, then our cost level is much more affected by service provider inflation. 

We often hear about the fight against inflation, the custodians of which are central banks, i.e. the national banks of each country. The reason for this is that inflation that is too high and too low is both a problem for the economy. A is too high because it devalues a wages - especially those with the weakest ability to assert their interests and, in general, the poorest social groups. It also increases the loans interest rate, thus harming businesses raising funds opportunities, which slows down economic growth.

Inflation that is too low is bad because it restrains consumption and encourages savings, which slows down economic growth. Economists generally agree that inflation measured on the basis of consumer baskets is biased upwards, therefore the actual price stability it is somewhere in the 1.5-2 percent inflation range. This means that in case of lower inflation than this, in fact about deflation, i.e. we can talk about a decrease in the actual price level. 

In such cases, even bundles of banknotes stuffed into the pillow are useful to the saver (i.e. woman a their present value) even if they don't get interest for it, as in the bank, since the money can be used to buy more goods tomorrow than today. This causes people to cut back on consumption and save instead, which in turn hurts businesses and creates unemployment, further reducing demand and starting a deflationary spiral. 

By default, central banks fight against inflation that is too low or too high by lowering or raising the interest rate, this is called monetary policy. There are several ways to do this, but the bottom line is that they set an inflation target - typically 2-3 percent - and try to keep the consumer price index around it with more or less success.