PRICE INDEXES AND INFLATION

We have concentrated in ‘this chapter on the measurement of output. But people are also concerned with price trends, with movements in the overall price level, with inflation. What do these mean?

As an example, take the year 1999. In that year, the prices of most major categories rose modesty food prices rose 2 percent and medical-care prices rose 3.5 percent. for example. Apparel prices declined, however, primarily because of sharp declines in the prices of imported clothing. Overall, when weighted by total expenditures in different areas. the consumer price index (CPI) rose 2.1 percent in 1999. In other words. the inflation rate was 2.1 percent.

The opposite of inflation is deflation, which occurs when’ the general level of prices is falling. deflation have been rare in the late twentieth century. In the United States. the last time consumer prices actually fell from one year to the next was 1955. Sustained. in which prices fall steadily period of several years. are associated with depressions. such as those that occurred in the United States in the 1930s and the 1890s. More recently, Japan experienced a deflation in the late 1990s as its economy suffered a prolonged recession.

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