The Consumer Price Index (CPI) reflects the change in prices over time of goods and services typically purchased by households. The GDP Deflator, on the other hand, reflects the price change of all domestically produced goods and services in an economy. In other words, CPI measures how fast prices are rising for a specific group of products while GDP Deflator measures the inflation rate for the entire country. Both metrics are important for policymakers when making decisions about interest rates and economic growth, so it’s important to be aware of the differences between them. Let’s take a closer look at each metric to see how they differ.
What is CPI Deflator?
CPI Deflator is a measure of the average change in prices of all goods and services in an economy over time. CPI Deflator is calculated by dividing the CPI for a given year by the CPI for the previous year. The CPI Deflator can be used to adjust for inflation or to compare economic activity between two periods. For example, if the CPI Deflator for 2012 is 1.1, this means that prices on average increased by 10% from 2011 to 2012. CPI Deflator is also known as the Price Index. CPI Deflator is released monthly by the Bureau of Labor Statistics in the United States.
What is GDP Deflator?
The GDP deflator is a measure of the level of prices of all final goods and services in an economy. GDP deflator = Nominal GDP/Real GDP x 100. GDP deflator can be used as a tool to determine whether an economy is experiencing inflation or deflation. If the GDP deflator is less than 100, then the economy is experiencing deflation; if the GDP deflator is more than 100, then the economy is experiencing inflation. GDP deflator can also be used to compare GDP across different time periods or across different countries.
Difference between CPI and GDP Deflator
CPI and GDP deflator are two measures of inflation. CPI, or the Consumer Price Index, measures the prices of a basket of goods and services that are representative of what consumers buy. The GDP deflator, on the other hand, measures the prices of all goods and services produced within a country’s borders. CPI is a more accurate measure of inflation because it takes into account the changes in prices of specific items that people actually purchase. The GDP deflator, while still a useful measure, is less accurate because it does not account for changes in the mix of goods and services produced within a country. For example, if there is an increase in the production of luxury goods, the GDP deflator will overstate inflationary pressure. CPI is a better measure of true inflationary pressures in the economy.
Conclusion
The CPI and GDP Deflator are two measures of inflation or the rate of increase in prices. They both have their pros and cons, but the CPI is generally seen as a more accurate measure. However, the GDP Deflator can be used to adjust for changes in the composition of economic output over time.
