• Inflation important economic indicator
• Calculation based on price changes for around 300,000 products and services
• Whistleblower for central bank policy
Investors on the market are not the only ones observing inflation or devaluation, because they play a decisive role in the investment strategy. But how is the inflation rate actually calculated?
Calculating the inflation rate
In Germany, the inflation rate is determined monthly by the Federal Statistical Office. The statisticians compare the price development from one month to the next and compared to the previous year by recording the prices of numerous goods and services and comparing them to the last month and the comparable month of the previous year.
Data collection and price collection
The experts also receive the data for their calculations from the statistical offices of the federal states. The prices for products are regularly collected and recorded there. For this purpose, the statisticians compare more than 300,000 individual prices for services such as visits to the hairdresser or postal services, rent, fuel or supermarket products. The price for the same product at the same location is compared in each case.
The products are assigned to different categories and collected in a so-called “shopping cart”. The virtual shopping basket includes a total of 650 types of goods and, according to the statisticians, is intended to represent “all goods and services purchased by private households in Germany”. However, the weighting of the individual product groups is inconsistent and is recorded in the so-called weighting scheme. Things that make up a large part of income, such as rent or transport, are highly weighted, with the costs for public transport also including gas station prices and vehicle acquisition costs.
Prices in the groups “Education”, “Postal and Telecommunications” and “Furniture, Lights, Appliances and Other Household Accessories” are weighted significantly less. Accordingly, a price change in the less weighted categories also has less impact on the consumer price index.
The Federal Statistical Office in Wiesbaden checks every five years whether an adjustment to the basket weighting is necessary.
What influence does the inflation rate have?
The change in the consumer price index, the inflation rate, shows primarily how the prices for products in certain product groups have changed over the course of a fixed period of time. It is therefore initially used for information purposes and provides information about the stability of the monetary value.
However, the inflation rate also serves the European Central Bank and other central banks as a pointer to possible necessary adjustments in their monetary policy. Because inflation, i.e. devaluation of money, threatens capital formation, which is why monetary authorities are striving for relative stability of the price level.
If inflation is high, there is a loss of purchasing power, while debtors benefit from the fact that money – and thus also their debts – are worth less. In order to protect themselves from inflation, many investors invest their money in inflation-proof assets: gold and digital currencies are mentioned again and again in this context. Shares in companies that can pass on higher purchasing and production costs to customers by enforcing price increases are also seen as a means of hedging against inflation.
Accordingly, the inflation rate is not only clearly noticeable for consumers in their wallets, but also an important source of information for monetary authorities and their monetary policy as well as investors. In the past, the markets have always reacted sensitively to high inflation rates.
Editorial office finanzen.net
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