Which statement defines the inflation rate?

• A. The percentage change in the money supply.
• B. The percentage change in the price of assets.
• C. The percent change per year in a price index, typically the Consumer Price Index.
• D. The level of overall prices at year end.

Answer: (C)

Inflation rate is the percent change per year in a price index, typically the Consumer Price Index. The CPI tracks the average cost of a basket of goods and services, so comparing its level from one year to the next shows how much prices have risen on average. This makes inflation a rate of change, not the overall level of prices. For example, a move from 100 to 104 indicates a 4% inflation rate. The other statements describe money supply growth, asset-price changes, or the price level itself, none of which define the inflation rate.