Obviously, inflation appears to denote money supply and not cost of living. Yet, it is the movement in cost of living index that is normally used to compute inflation rate - e.g. WPI (wholesale price index). .
This is why the question asked.
2006-09-22 02:28:02 · 7 answers · asked by small 7 in Social Science ➔ Economics
Oooooh, good question! I'm glad to see someone try to make a distinction, because this is important and is not widely understood. Thank you!
Succinctly, inflation is an estimate of the change in cost of living where the standard of living doesn't change.
Inflation as a concept means decrease in purchasing power of a currency, or more clearly the general rise in prices over time (the two are really the same thing); inflation as is usually understood, ie when it is said "inflation is annualized at 3.1% per the Fed" reflects some change in the nominal (sticker) price of a basket of goods that is supposed to represent how much more of a burden it is for the average American to survive.
The reason why we use cost of living measurements to estimate inflation is because you can't just look at the change in the money supply to get your answer. If money demand keeps up with money supply, you have no inflation. But money demand is elusive and difficult to estimate, and besides, inflation at this level is very obtuse.
What matters then is how it impacts the person; therefore, we look at a basket of goods and ask how much more difficult is it today for a person to live at the same level they did last year.
Again, good question.
2006-09-22 03:28:46 · answer #1 · answered by Veritatum17 6 · 1⤊ 0⤋
cost of living is the amount of money it takes to sustain a lifestyle. there is an index made up of things that a certain (assumed to be average) lifestyle needs and thus by pricing those things, they can say what the cost of living is for say, a family of 4 in Arizona...or whereever. this will depend on the actual price of the items in that index (think of it as a shopping basket)
inflation is a reflection of buying power. If you are standing there with $20 in your hand, how much will it get you? think, 2 loaves of bread, a gallon of milk, a pound of lunch meat, and some cheese.....this magically equals $20 whereever you are. Now if two weeks from now, that same basket full of stuff costs 22.50, then inflation has occurred, because the buying power of your $20 has decreased...you either give up something, or spend more money. If it goes the other way, usually we're in whats called a recession....where no one has money to spend, and goods are sitting on the shelf, rather than being bought, so prices go down, and you can buy all the above plus a case of coke with that same $20.
you can see how these two are related....you figure the cost of living today, and compare it with yesterday, and if the price goes up, inflation has occurred.
2006-09-22 02:43:39 · answer #2 · answered by ladylawyer26 3 · 2⤊ 0⤋
Inflation is the redection of the buying power of money. Generally noted as a percentage.
Cost of living is pretty self explanitory, but is determined by a battery of goods and services that the average adult requires to live and work. Generally noted as a dollar amount unless compared to all other cities in which case would be a coefficient ratio.
All else being equal, inflation will generally cause an increase in the cost of living.
2006-09-22 07:45:00 · answer #3 · answered by wvukid21 2 · 0⤊ 0⤋
Changes in Gross Domestic Product - Inflation Rate = Growth
If Growth is Positive, the economy is growing
If Growth is negative , the economy is slowing
If the economy is growing foreignors will invest in the economy
Governments including ours LIE about the true inflation rate to attract foreign investment
Currently the US Interest rate is 3% higher than the published Government figures.
Reagan changed the way Government calculates the WPI figures and they have been fudged ever since. Housing Sales increases have been deleted and replaced by rents. COre vs non Core inflation increases have been included.
2006-09-22 06:06:32 · answer #4 · answered by Anonymous · 0⤊ 0⤋
Cost of living is a level. Inflation is a rate of increase (by the way, inflation is typically a rate of increase of Consumer Price Index, not wholesale prices, as you implied; wholesale prices inflation, or PPI inflation, is reported as such and receives relatively little attention compared to CPI inflation).
Cost of living, in turn, may differ from price level for methodological reasons. In the U.S., for example, the Consumer Price Index is computed for a basket of goods consumed by a typical urban wage earner, excluding housing and energy. Time series for baskets including housing and energy are available, but considered to be experimental.
2006-09-22 06:38:04 · answer #5 · answered by NC 7 · 0⤊ 0⤋
Since cost of living is actually how much it costs to live and inflation is how much buying power money has decreases, you need to know the cost of living to determine inflation.
2006-09-22 02:32:16 · answer #6 · answered by WEIRDRELATIVES 5 · 1⤊ 0⤋
cost of living is the price of your average shopping basket (economic basket, not local grocery store!) inflation is a general and sustained rise in prices. inflation describes an increase in the cost of living
2006-09-22 03:12:55 · answer #7 · answered by mr. me 3 · 0⤊ 0⤋