CPI inflation measure Flashcards
what is inflation
the persistent increase of prices in an economy in a year
rising inflation - when inflation increases
disinflation - decrease in inflation
deflation - negative rate in inflation
how does CPI (consumer price index) help measure inflation
expenditure survey carried out every fortnite(given to households to see what they are buying and the quantity and price and place they buy from)
a consumer basket is formed - where most of the most popular goods and services are formed with average prices attached
(these are good because it shows what the average family is buying on a fortnightly period)
prices of these goods and services are weighted based on % if income
weighted prices are added to give total weighted price of the basket
how to construct an index
select base year with index value 100
weighted basket prices convert into index numbers
percentage change calculations done to work out annual inflation rates
basket is updated yearly (goods and services, quantity)
Cons of CPI
differences between RPI (Retail Price Index) and CPI
housing costs are in the RPI basket
RPI calculate in a arithmetic mean whereas CPI calculate in a geometric mean therefore RPI will have a higher rate
issues with CPI
personal inflation rates differ as not everybody will be buying all the goods and services in the basket eg high and low income household, foreign holidays in high income households therefore the inflation rates increase for foreign holidays which doesn’t affect low income households vice versa eg bus.
price fluctuations of certain goods which can distort the overall CPI inflation rate eg food and energy. demand and supply changes the price and due to the fact that we spend so much money on them, they are weighted heavily on the CPI that any price change will heavily affect the CPI inflation rate.
can use core CPI to counter as it shows the underlying inflation rates
do not include housing costs, repair work, rent, interest rates, mortgage, maintenance but can be countered using CPIH which includes housing
basket updates are too slow especially when consumption rates are changing rapidly, therefore does not show current statistics
