Consumer Price Index (CPI) and Gross Domestic Product (GDP) deflator are the two measures of inflation. While people may get confused on how to distinguish one from the other, CPI and GDP deflator have their own purpose of why they exist and being used in determining a country’s inflation rate.
CPI Deflator
CPI or consumer price index is one of the most closely watched economic statistics due mainly because it reflects changes in real values. CPI is the measure of changes in the price level of consumer goods purchased by households over time. It is more focused on a market basket which consists of a list of fixed items used to track the progress of inflation in an economy. CPI is used to index the real value of salaries, pensions in order to regulate prices. By deflating monetary magnitudes, CPI will show changes in real value.
GDP Deflator
GDP (gross domestic product) refers to the total value of all final goods and services produced within an economy over a specified period of time. GDP deflator measures price level but will focus more on all new, domestically produced, final goods and services in an economy. Instead of taking into consideration the change in consumer consumption and its effect on price, GDP deflator has a broader take. It considers all the goods produced domestically in a year weighted by the market value of the total consumption of each good. As a result, the expenditure pattern of an economy is up to date.
Difference between CPI and GDP deflator
Difference between CPI and GDP deflator is often very small. However, it doesn’t hurt if how each basically separate from the other as well. For one thing and as stated above, GDP deflator reflects the prices of all goods and services produced within an economy while CPI shows prices coming from a representative basket of goods and services purchased by consumers. Another significant difference between them is that CPI uses a fixed basket which consists of a fixed items being used in tracking down the progress of inflation of an economy; GDP deflator uses comparison of prices products currently produced relative to the prices of goods and services in the base.
For most developed countries where they continually use price indexes for nearly everything, these small differences between CPI and GDP deflator could bring about significant changes which can shift revenues and expenses by billions. So it is best to not underestimate the difference.
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In brief: • Both GDP deflator and CPI are measures of inflation. • GDP deflator measures price level but will focus more on all new, domestically produced, final goods and services in an economy • CPI is the measure of changes in the price level of consumer goods purchased by households over time. • CPI uses a fixed basket to compare prices in determining inflation progress. GDP deflator uses the price of the currently produced product relative to the price from the base year. |