Econometrics

Measuring inflation is a question of econometrics, finding objective ways of comparing nominal prices to real activity. In many places in economics, "real" variables need to be compared. For example, in order to calculate GDP, effective interest rate and improvements in productivity are the "real variables" used in the calculations. Each inflationary measure takes a "basket" of goods and services, then the prices of the items in the basket are compared to a previous time, then adjustments are made for the changes in the goods in the basket itself. For example, a month ago canned corn was sold in 10 oz. jars for $9, and this month it is sold for $10. Assuming the quality of the product does not change (e.g. a different metal in the can, a new type of corn), the resulting price change is attributed to inflation. Economists analyze the aforementioned factors when calculating inflation for a product. For example, if that same can of corn was sold in 9 oz. jars for $9, and this month is sold in 9 oz jars for $10, and there are no other economic factors, then an economist would analyze the product as undergoing inflation.