The price level refers to the general average of prices for all goods and services in an economy over a specific period, such as a month or year. It reflects the purchasing power of currency within that economy.
- Measured using indexes that track average prices across representative market baskets
- Major price level indexes include CPI and GDP deflator
- The price level rises with inflation as it takes more currency units to purchase the same basket over time
A low/falling price level means currency has higher value and goods are cheaper. A high/rising price level implies currency has lower purchasing power and goods cost more.
Central banks manage monetary policy to maintain stable incremental price level increases around 2-3% annually, signaling predictable currency value and supporting economic activity.
Individual prices vary while price level indexes capture overall trends. Understanding price level movements is crucial for planning budgets, investments and wage/benefits negotiations.