Have you ever wondered why GDP increases but life isn't any easier?

That's when you need to understand the GDP Deflation Index — a tool that helps us distinguish between real growth and just rising prices.

The GDP Deflation Index, also known as the hidden deflation index, is a way to measure how the prices of goods and services domestically have changed over time.
It allows us to separate the portion of GDP growth caused by actual increased production from the part that's just due to rising prices.

Its operation is quite simple.
The deflation index compares nominal GDP (the value of all goods and services at current prices) with real GDP (calculated at a fixed base year's prices).
This way, we can clearly see the level of inflation in the economy.

The calculation formula isn't too complicated:
GDP Deflation Index = (Nominal GDP divided by Real GDP) multiplied by 100.
If you want to know how much the overall price level has changed in percentage, just subtract 100 from the result.

Here's how to interpret the results:
If the index equals 100, prices haven't changed compared to the base year.
If it's greater than 100, the overall prices have increased (inflation).
If it's less than 100, the overall prices have decreased (deflation).

Let's take a real-world example.
Suppose in 2025, a country's nominal GDP is $1.1 trillion, while its real GDP (using 2024 as the base year) is $1 trillion.
Then, the deflation index would be 110, meaning the overall prices have increased by 10% since the base year.
The beauty of the deflation index is that it gives us an accurate view of the true economic health, unmasked by inflation.