Macroeconomics
Price Indices The Consumer Price Index(CPI) isacrucial economicindicatorusedtomeasureinflation inagiven economy. It plays a signifcant role in economic policy-making and fnancial decision-making. Consumer Price Index (CPI) ● Measurement of Inflation: The CPI is a statistical measure of inflation that reflects the average change over time in the prices paid by urban consumers for a market basket of consumergoodsandservices.Ittrackshowthepricesoftheseitemschangefromoneperiodto another, typically on a monthly basis. ● Monthly Reporting: The CPI is collected and reported monthly by the Bureau of Labor Statistics(BLS) intheUnitedStates.Thisdataprovidesvaluableinsightsintothechangingcost of living for consumers. ● MarketBasket: TheCPIiscalculatedbasedon changesinthepricesofa"marketbasket"of goodsandservices. Thisbasketrepresentsaselectionofitemsthatare commonlypurchased bytheaverageurbanconsumer. Thecompositionofthemarketbasketisperiodicallyupdated toreflectchangesinconsumerspendingpatterns.Itincludesitemslikefood,clothing,housing costs, transportation, healthcare, and entertainment. ● Urban Population Focus: The market basket items are based on the spending habitsofthe urbanpopulation. It'simportanttonotethatapproximately87%oftheU.S.populationlivesin urban areas. The CPI aims to capture the inflation experienced by this majority of the population. ● Weighted Components: Each item in the market basket is assigned a weight based on its relative importance in the average consumer's budget. For example, housing costs and healthcare expenses typically carry more weight in the index than less signifcant items like clothing. This weighting ensures that the CPI reflects changes in consumer priorities and spending patterns.
The CPI is calculated as follows: It is then used to calculate the inflation rate as follows: CPI = × 100
× 100 ( )− ( ) ( )
Inflation rate =
61
© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE|MACROECONOMICS
Made with FlippingBook - Online Brochure Maker