Inflation has once again taken center stage in economic discussions. But what is inflation? The classic definition is “a widespread and sustained rise in prices.” It is primarily a monetary phenomenon, since in an economy without money—where goods are exchanged directly (think of barter)—changes in “prices” would reflect shifts in people’s valuations of certain goods or services relative to others. It is “widespread” because it refers to many goods rising in price at the same time; it is “sustained” because it must be a phenomenon that does not occur just once, but rather repeats itself over a period of time.

How is inflation measured? Measuring it directly is extremely difficult, time-consuming, and, as a result, not very informative. The closest thing we have in Chile to an accurate measure of inflation is the GDP deflator, which is officially released once a year (unofficially, every quarter), with a lag. A measure like that wouldn’t allow for economic policy decisions regarding prices, right? Therefore, what is done is a reduction. Based on the household budget survey (that is, what those of us living in Chile consume), adjusted for GDP measurements (people tend to underreport what they spend on, for example, alcohol and cigarettes), the most consumed products and services are ranked according to certain representativeness criteria. Thus, a basket of the average consumer is constructed, which is updated every 5 years, and whose value is what we know as the Consumer Price Index (CPI). This is published monthly, on the 8th of each month relative to the previous month, and its variation (monthly or annual) aims to show a rise or fall in the cost of living in our country.

Why is this important? First, it allows us to assess changes in the cost of living and distinguish them from specific price increases, which helps authorities make economic decisions. For example, if the Central Bank sees that inflation is rising more than desired, it can raise interest rates to control it. If the Minister of Economy sees that the rise in the CPI is due to a price increase in, say, potatoes, they could investigate what is happening in that particular market. Second, in our country there is the UF, an indexation measure that varies according to movements in the CPI. This affects countless transactions in the local market, both financial (bond prices, loans, etc.) and real (lease agreements, wages, etc.).