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What is the inflation rate and how to calculate it using GDP?

Price rises have been a real cause for economic concern in recent years. We take a look at how to calculate the rate of inflation.

What is the GDP price deflator?

Inflation has been a hot topic in the United States in recent years. The pandemic-induced economic turmoil saw the breaks slammed on the US economy and the subsequent restart has sent prices spiralling.

Throughout 2022 everything from groceries to gasoline was subject to rapid price rises and inflation soared to the highest level in decades. The final inflation data for 2022 found that price rises were running at an annualised rate of 6.5% in December.

This was a 0.6-percentage-point drop on the figure of 7.1% recorded in November, but remains uncomfortably high. The next announcement from the Labor Department will be made on 14 February.

What is the gross domestic product price deflator?

The monthly inflation reports issued by the Labor Department are based on the Consumer Price Index (CPI), which measures the average change over time of a variety of common products. The CPI figure compares the price of a typical ‘basket’ of goods and services, and measures how its value has risen.

However some analysts prefer to look at the gross domestic product price deflator to measure price changes.

The GDP price deflator measures the change in price for all goods and services produced during a given time period. By not focusing on a select group of items this helps to ensure that all price changes are accounted for when inflation is calculated.

GDP can fluctuate, but the GDP price deflator shows how much the change is the result of a change in price level across the board.

How to calculate inflation using the GDP price deflator

GDP is the sum of the value of all goods and services produced and sold. It is often used to judge economic strength by combining the value of what is being produced with the quantity.

The GDP price deflator is a measure of how the price of all those good and services has changed. To calculate, use the following equation:

GDP Price Deflator = (Nominal GDP ÷ Real GDP) × 100

This will give you the rate of inflation in terms of GDP, which takes far more data into account that the CPI-based alternative.

Changes in consumption patterns and the introduction of new goods and services will be automatically incorporated into this figure to ensure that the inflation rate more truly reflects how economic strength has changed over time.


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