Merijn Knibbe — The difference a price level makes

The European Central Bank targets the consumer price level, among other reasons because neoclassical macro-economic models often picture a world where this is the only level which matters. Indeed, as there is only one product in quite some models, the only level which even can exist. In reality, money is not only used to purchase vegetables and cars (household consumption) but also to pay for street lights (government consumption)and new houses and machinery (fixed investment). Theoretically, a broader inflation metric like ‘domestic demand inflation’ (household consumption + government consumption + investments) is therefore superior to a consumption price metric as far as targets go….

Real-World Economics Review Blog
The difference a price level makes
Merijn Knibbe

There is no such "thing" as a price level. That is to say, price level is not an observable. It is a theoretical construct that is defined operationally, usually in terms of an index, often by a government agency charged with the task. Different governments may choose different operational definitions. Historically, price level is often more a guess.

Price level is particularly important since it is one of the three chief factors taken into account in macroeconomics — growth, employment, and price level — since macro is a "policy science" and these are major determinants in policy owing to their political implications. Therefore, getting the measures right is of utmost importance to economic welfare, but all three measures are operationally defined rather than observed directly. This allows for stretching a case based on ideological approach, since there are winners and losers, e.g., creditors and debtors, borrowers and savers, owing to policy choices influenced by the concept and measurement of price level.

Price level is one of the most ambiguous and misunderstood terms in economics, policy, and politics, as well as by ordinary people who confuse it with price volatility of commonly used goods whose prices are observable. This is often used rhetorically to promote a policy such as austerity to "control inflation" when price level is not the most salient issue in context.