I just learned about the deflation index and found it quite useful for understanding the economic situation. Basically, it helps us distinguish between real growth and growth caused only by rising prices.

Simply put, the deflation index (also called the hidden deflation index) is a measure of how the prices of goods and services in a country have changed. It shows us how much of the GDP is due to actual increased production, and how much is just due to price increases.

Its operation is quite logical. This index compares nominal GDP (calculated at current prices) with real GDP (calculated at the prices of a specific base year). From there, we can see the extent of price changes in the economy.

The formula isn't complicated: Deflation index = (Nominal GDP divided by Real GDP) multiplied by 100. Then, to find out how much prices have increased or decreased in percentage, subtract 100 from this index.

The easiest way is to look at the result:

If the deflation index equals 100, it means prices haven't changed compared to the base year.

If the deflation index is greater than 100, it indicates prices have increased (inflation).

If the deflation index is less than 100, it indicates prices have decreased (deflation).

Here's a more specific example: in 2024, a country has a nominal GDP of 1.1 trillion USD, but its real GDP (using 2023 as the base year) is only 1 trillion USD. Then, the deflation index would be 110. This shows that prices have increased by about 10% compared to 2023. Pretty easy to understand, right?

In fact, understanding the deflation index helps us better grasp the economic situation and distinguish between real growth and just inflation.