Measuring inflation - History, theory, applications and importance

Abstract

Sweden and other western economies have been battling low rates of inflation since the eco-nomic crisis of 2008. However, the Swedish economy is booming, with soaring house prices and falling rate of unemployment which got us to wonder how these phenomenon’s could be observed at the same time. We therefore conducted a thorough investigation of what inflation actually is and how it is measured. We found that different types of consumer price indexes where the most widely used approach to measure inflation, with the Laspeyres method of computing indexes as the most prominent. Furthermore, the way of measuring inflation differs from country to country, where the most significant distinctions between Sweden’s KPI and the Eurozone-countries generalized HICP, is that costs attributed to housing are omitted in the HICP. In the light of these findings we came to the conclusion that the lack of high rate of inflation in Sweden, even when the economy is booming, might not be as extraordinary as we first expected.