Statistical Errors in Expected Inflation Rates - Research Paper Example

Now let’s imagine that the average inflation rate is 2% for the year 2012 and that at the beginning of the year a product costs $100, in the month of February if these figures are correct then the product is supposed to be sold for $102, surprising but what most people don’t realize is that most of the inflation rates are calculated monthly and not annually.

By match, this same price is supposed to have had another increase of 2% on average and the new price is to be $104 this is how a common expects the inflation to affect every product. This means that by the end of the year, the product should have had an increase in its price similar to the geometric progression of 2%. This however is not the case, since inflation is calculated by using the price of common things such as food and their price in the previous year. Then using this price to estimate how much the price would have gone up in the consecutive months such that by the end of the year the final price is used to get the increase, which is expressed in terms of the original price.

The mistake that is made here is by saying that the inflation rates are supposed to increase by 2% without referring to the duration over which this is calculated or the previous amount or percentage over which this inflation has been based on. This leads to assumptions by the reader about the expected prices since they do not know how long this percentage is effective and when to start calculating the new prices. They should have specified the duration when these rates are supposed to change.
This is how the information should have been reported. First, in the report, they should mention the previous inflation rates. For example, if in 2011 the inflation rate was 1% then it should be mentioned. After this, they are supposed to say the duration over which this inflation is supposed to change. By so doing they save the reader a lot by specifying when they should start another calculation. For example, if a product costs $100and a 2%, inflation affected it, and then the new price should be $102. This reader should be able to know what will change after how long.

Another important thing that has to be mentioned is the way that this inflation rate will affect the prices of important products or the money market. For example, if in 2011, the exchange rate was 1.9 per US dollar for every EURO then how will this inflation rate affect these rates. This should also mention how effective these will be on the prices of products that are mostly consumed by many people like wheat flour. Without mentioning this then a lot of assumptions are made, one might think that these rates directly apply to prices of products and changing rates without any other calculations involved. This is not always the case since inflation rates are mere prediction and does not necessarily have to be effective. Sometimes these rates do not even take any effect and the exchange rates, as well as the prices of the products, do not change at all.

This report should also give an example of how these new inflation rates will have an effect on the price of a product every month of the year. For example, if a product costs $200 by the end of 2011, this report has to mention how much this will increase in 2012 and after what duration will it be rising and by how much in each subsequent month of the year 2012. They have to be specific and mention how much this increase will be effective every month since we do not expect that the prices will increase once but has to increase slowly throughout the entire year.

Conclusion
There are many statistical stories given by the media each day regarding various statistics and estimations that are expected to take place in a particular period. However, this information can lead to misjudgments since the reader might not know how these percentages will have an effect on the previous rates. To avoid this, these reports have to be specific to the common person by specifying the range in which these figures will have an effect on the actual prices of products. The best way to achieve this is by the use of examples. Examples clearly indicate how these percentages affect each product and the common person can use this to calculate the price change for any product that they want. Read More