161 Glossary: Inflation and Price Indexes

adjustable-rate mortgage (ARM) a loan used to purchase a home in which the interest rate varies with market interest rates

base year arbitrary year whose value as an index number is defined as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year

basket of goods and services a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time

business cycle the relatively short-term movement of the economy in and out of recession

cost-of-living adjustments (COLAs) a contractual provision that wage increases will keep up with inflation

indexed a price, wage, or interest rate is adjusted automatically for inflation

Consumer Price Index (CPI) a measure of inflation calculated by U.S. government statisticians based on the price level from a fixed basket of goods and services that represents the purchases of the average consumer

core inflation index a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

deflation negative inflation; most prices in the economy are falling

depression an especially lengthy and deep decline in output

Employment Cost Index a measure of inflation based on wages paid in the labor market

GDP deflator a measure of inflation based on the prices of all the components of GDP

hyperinflation an outburst of high inflation that is often seen (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

index number a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

inflation a general and ongoing rise in the level of prices in an economy

International Price Index a measure of inflation based on the prices of merchandise that is exported or imported

nominal value the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value

peak during the business cycle, the highest point of output before a recession begins

Producer Price Index (PPI) a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

quality/new goods bias inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not take into account improvements in the quality of existing goods or the invention of new goods

real value an economic statistic after it has been adjusted for inflation; contrast with nominal value

recession a significant decline in national output

substitution bias an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise by a lot

trough during the business cycle, the lowest point of output in a recession, before a recovery begins