Price Level

1. Definition

The Price Level refers to the average of current prices of goods and services across the entire economy. * It is the inverse of Purchasing Power. When the price level rises, each unit of currency buys fewer goods.

2. Key Metrics

1. CPI (Consumer Price Index): Measures the weighted average of prices of a basket of consumer goods and services (transportation, food, medical care). It is the most common gauge of inflation.
2. PCE (Personal Consumption Expenditures): The Federal Reserve's preferred measure of inflation. It covers a broader range of goods and adjusts for consumer behavior changes (substitution) more quickly than CPI.
3. PPI (Producer Price Index): Measures price changes from the perspective of the seller (wholesaler/manufacturer).

3. Phenomena

• Inflation: A sustained increase in the general price level.
• Deflation: A sustained decrease in the price level. It often leads to lower production and higher unemployment (Economic contraction).
• Hyperinflation: Out-of-control inflation where currency becomes worthless (e.g., Venezuela, Zimbabwe).

4. Impact on Markets

• Interest Rates: The primary job of Central Banks (like the Fed) is price stability. If the price level rises too fast, they hike interest rates to cool down demand.
• Bond Yields: High inflation erodes the fixed income from bonds, causing bond prices to fall and yields to rise.