| > Inflation tracks a basket of goods of what people currently buy Exactly. If there was no except, you could just peg inflation to an apple and be done with it. You need the basket exactly to filter out the noise that occurs when the goods in the basket see an independent change in value. Food is unquestionably less valuable today as compared to most of the past, irrespective of the change in value of the currency. > Not really, since different goods do not always correlate in price Exactly. That is because everything has its own independent value, including currency, which change over time independently. Let's say you can buy an apple for $1 today. But tomorrow a damaging storm decimated the apple crop. Now it takes $2 to buy an apple. Did the price rise because apples are now more valuable, or because the dollar is less valuable? Who knows? It is impossible to know. But if you look at the change across many items... > Inflation is defined as the general rise in prices Exactly. The general rise in price is the value of the currency declining. It is statistically improbable for all the items in a basket of goods to gain in value at a similar rate all at the same time. As such, you can conclude with near certainty that the rise in price is a result of the decline in value of currency. As it pertains to the above, if a general rise in price over a given period is 25¢, while apples are up $1 over the same period, then you can reasonably surmise that the storm caused apples to become 75¢ more valuable than the previous state with the other 25¢ being a decline in the value of the currency. There is no perfect way to measure the change in value of currency, but that's a really good way to do it. Which is why we do it. |