Inflation parameters?

Can a knowledgeable comment in English, how they come up with the inflation rate? What parameters are use to come up with the inflation rate? Are those the same parameters that all countries use? Is Inflation rate set by Federal bank? What is a good inflation rate and why? When an inflation rate is TOO low and why?

Thanks!

Inflation parameters?

Inflation is calculated by comparing the change in the cost of living from year to year. Many of the goods that make up the standard of living are the same in different countries but there are also different goods used by different central banks. The Fed sets monetary policy with an inflation range in mind but does not target a specific rate nor does it determine the actual inflation rate. An inflation rate of between 2%-4% is a good target range. It is not too high, which would be detrimental to economic growth because interest rates would rise to compensate for the declining value of money. If you expected everything you buy to increase by 5% you would charge an even higher interest rate to anyone who wanted to borrow money. It is also not too low, which could fuel deflationary expectations which can jam up the economy as people stop buying goods while they wait for prices to bottom out before making purchases. If you expected prices to start falling but didn%26#039;t know by how much you wouldn%26#039;t buy anything until you knew when prices were going to stop falling.

Inflation parameters?

The inflation rate is identifiable by the Consumer price index:

it is a weighted/ measurement of the cost of a group of products that we all buy, you%26#039;ll see it report as excluding the commodities like oil as they weight for the rise in them to actually influence the price of the products at the retail stores.

Other countries measure there own similiar based on the products all their citizens buy, or some in %26#039;odd%26#039; (usually a small third world) comparison, compare the value of their currency to another (mainly) the dollar but that method has gross flaws.

So the Fed and Gov%26#039;t use the prices to determine inflation; and the Fed uses that as a partial determination as to whether intterest rates (the fed fund rates) need to change, raising the rate to try and slow the growth of the economy or cut the rate to try and expand growth; on the idea if borrowing is cheap business will concider growth (like building a new factory ect.) so the economy starts expanding again.

The FED comes up with a range to keep inflation at, as they want to maintain growth, but don%26#039;t want to much growth at once, if you grow to much ahead of say other countries, you%26#039;ll get to the point where your products can no longer be competing, and causes a slow down till the world catches up; also and probably of greater importance is when the economy and interest rates are not predictable, then any investments and spending decisions are at a higher risk as to whether the can make a sound decision on the matter; so only necessary barrowing and spending occurs untill decisions can be made %26#039;Smartly, ie. with predictable results%26#039;;

2-4% is about the FED target; below 2% is normally the recessionary point, above 4% is viewed as getting to heated, both of course of a continous period of time normally a couple or few Quarters. The reason for the targets like 2% for recession (although not actually negitive) is they know the number is not a perfect measurement, and if prices don%26#039;t ever change there is never a benifit of buy today over tommorow so the delay in purchase that occur would push it negetive, and then you%26#039;ll definetly will stop making any unnessary purchase today that you can get tommorow cheaper. Problem can be seen today in the Housing sector, house prices falling so people owe more then their house is worth; so they can%26#039;t afford to sell it. and it is worse since they bought it with temporary reduced interest rates no going to be set at higher rates, they got to pay more for it now. If the whole economy was sliding it would really be worse as they very well might see the pay reducing.

think I got all them ?

The third link is to the Fed itself it has a wealth on info and statics; Some of those stats are complex but not all.

4th is CPI site with a bunch of info.