Inflation is measured by the percentage change in prices level. Prices of some goods rise faster than others, which means that relative prices are changing at the same time that absolute prices are rising. The measured inflation rate records the average change in absolute prices. To measure inflation, subtract last year s price index from this year s price index and divide by last year s indexes, then multiply by 100 to express as a percentage. Therefore, during inflation the purchasing power of a dollar falls, and vice versa for deflation.
Deflation is a situation where the average of all prices of goods and services is falling.
In this period, inflation rates of U.S. were neither high nor low relative to other industrial nations. Inflation can also be measured by computing a price index. That is the cost of a market basket today expressed as a percentage of the cost of that market basket in the base year. GDP Deflator measures the changes in prices of final goods and services produced by the economy. It is a broader measure of price change.