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Price Level Definition
What is a ‘Price Level’
A price level is the average of current prices across the entire spectrum of goods and services produced in the economy. In a more general sense, price level refers to any static picture of the price of a given good, service or tradable security. Price levels may be expressed in small ranges, such as ticks with securities prices, or presented as a discrete value.
BREAKING DOWN ‘Price Level’
There are two meanings of the term price level in the world of business. One meaning refers to the price of assets traded on the market. The other meaning refers to the price of goods and services and is used in reference to inflation.
Price Level for Economists
When traders refer to price level, it is in reference to buying and selling a position in the security. When economists refer to price level, it is in reference to the buying power of money or inflation. In other words, economists are describing the state of the economy by looking at how much people can buy with the same dollar of currency. The most common price level index is the Consumer Price Index (CPI).
The price level is examined through a “basket of goods” approach, in which a collection of consumer-based goods and services is examined in aggregate; changes in the aggregate price over time push the index measuring the basket of goods higher. Weighted averages are typically used rather than geometric means. Price levels provide a snapshot of prices at a given time, making it possible to review changes in the broad price level over time. As prices rise (inflation) or fall (deflation), consumer demand for goods is also affected, which leads broad production measures, such as gross domestic product (GDP), higher or lower.
Price levels are one of the most watched economic indicators in the world. It is widely believed that prices should stay relatively stable from year to year so as not to cause undue inflation (rising prices). If price levels begin to rise too quickly, central bankers or governments look for ways to decrease the money supply or the aggregate demand for goods and services.
