Inflation is back in the economic discussion. But what is inflation? The classic definition is "a generalized and sustained rise in prices". It is an eminently monetary phenomenon, since, in an economy without money and only exchange of goods (think barter), changes in "prices" would respond to changes in people's valuations of certain goods or services with respect to others. It is "generalized" because it refers to many goods rising at the same time; it is "sustained" because it must be a phenomenon that does not occur only once, but is repeated over a period of time.

How do you measure inflation? Doing it directly is extremely difficult, slow and, therefore, not very informative. The closest thing we have in Chile to an accurate measure of inflation is the GDP deflator, which is officially delivered once a year (unofficially, every quarter), with a lag. Such a measure would not allow us to make economic policy decisions regarding prices, would it? Therefore, what is done is a reduction. Considering the family budget survey (that is, what those of us who live in Chile consume), adjusted by GDP measurements (people usually under-declare what they spend on, for example, liquor and cigarettes), the most consumed products and services are ordered, under certain criteria of representativeness. Thus, an average consumer basket is constructed, which is updated every 5 years, whose valuation is known as the Consumer Price Index (CPI). This is published monthly, on the 8th of each month with respect to the previous month, and its variation (monthly or annual) tries to show a rise or fall in the cost of living in our country.

Why is it important? First of all, it allows to evaluate the evolution of the cost of living and to separate it from particular increases in some prices, which helps the authority to make economic decisions. For example, if the Central Bank sees that inflation is increasing more than desired, it can increase the interest rate to control it. If the Minister of Economy sees that the increase in the CPI is explained by a rise in, for example, potatoes, he could investigate what is happening in that particular market. Secondly, in our country there is the UF, an indexation measure that varies according to CPI movements. It affects a number of transactions in the local market, both financial (bond prices, loans, etc.) and real (rental contracts, salaries, etc.).