Price indices as a tool for measuring inflation and economic dynamics

This article provides a doctoral-level treatment of price indices as instruments for measuring inflation and tracing macroeconomic dynamics. It situates the principal index-number formulas- Laspeyres, Paasche, Fisher, Törnqvist, and Walsh- within the axiomatic and economic-theoretic approaches formalized by Fisher (1922), Eichhorn (1976), and Diewert (1976, 1998), and it examines how statistical agencies operationalize these formulas through the Consumer Price Index, the Producer Price Index, the GDP deflator, the Personal Consumption Expenditures deflator, and harmonized indices such as the HICP. Three figures are developed to render visible, respectively, the taxonomy of price indices by formula and domain, the substitution wedge between fixed-basket formulas and the true cost-of-living index, and the feedback system in which indices simultaneously measure inflation and enter the reaction functions that shape it.