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The cpi and core inflation index

Imagine if you were driving a company truck across the country- you probably would care about things like the prices of available roadside food and motel rooms as well as the truck’s operating condition. However, the manager of the firm might have different priorities. He would care mostly about the truck’s on-time performance and much less so about the food you were eating and the places you were staying. In other words, the company manager would be paying attention to the production of the firm, while ignoring transitory elements that impacted you, but did not affect the company’s bottom line.

In a sense, a similar situation occurs with regard to measures of inflation. As we’ve learned, CPI measures prices as they affect everyday household spending. Well, a core inflation index    is typically calculated by taking the CPI and excluding volatile economic variables. In this way, economists have a better sense of the underlying trends in prices that affect the cost of living.

Examples of excluded variables include energy and food prices, which can jump around from month to month because of the weather. According to an article by Kent Bernhard, during Hurricane Katrina in 2005, a key supply point for the nation’s gasoline was nearly knocked out. Gas prices quickly shot up across the nation, in some places up to 40 cents a gallon in one day. This was not the cause of an economic policy but rather a short-lived event until the pumps were restored in the region. In this case, the CPI that month would register the change as a cost of living event to households, but the core inflation index would remain unchanged. As a result, the Federal Reserve’s decisions on interest rates would not be influenced. Similarly, droughts can cause world-wide spikes in food prices that, if temporary, do not affect the nation’s economic capability.

As former Chairman of the Federal Reserve Ben Bernanke noted in 1999 about the core inflation index, “It provide(s) a better guide to monetary policy than the other indices, since it measures the more persistent underlying inflation rather than transitory influences on the price level.” Bernanke also noted that it helps communicate that every inflationary shock need not be responded to by the Federal Reserve since some price changes are transitory and not part of a structural change in the economy.

In sum, both the CPI and the core inflation index are important, but serve different audiences. The CPI helps households understand their overall cost of living from month to month, while the core inflation index is a preferred gauge from which to make important government policy changes.

Practical solutions for the substitution and the quality/new goods biases

By the early 2000s, the Bureau of Labor Statistics was using alternative mathematical methods for calculating the Consumer Price Index, more complicated than just adding up the cost of a fixed basket of goods, to allow for some substitution between goods. It was also updating the basket of goods behind the CPI more frequently, so that new and improved goods could be included more rapidly. For certain products, the BLS was carrying out studies to try to measure the quality improvement. For example, with computers, an economic study can try to adjust for changes in speed, memory, screen size, and other characteristics of the product, and then calculate the change in price after these product changes are taken into account. But these adjustments are inevitably imperfect, and exactly how to make these adjustments is often a source of controversy among professional economists.

Questions & Answers

using the aggregate supply - aggregate demand model , explain how out and prices are determined , will out vary or stay fix in long run ?
SHAKEEL Reply
can you explain please
Tadesse
explain me too
Frank
The long-run aggregate supply curve is a vertical line at the potential level of output. The intersection of the economy’s aggregate demand and long-run aggregate supply curves determines its equilibrium real GDP and price level in the long run. Am I correct?
Tadesse
so it will out vary
Tadesse
no one corrects me
Tadesse
yes no-one corrects you.
Frank
but I'm here to listen your answer
Frank
aggregate supply is total of all industry supply.
Frank
In the long-run, the aggregate supply is graphed vertically on the supply curve. The equation used to determine the long-run aggregate supply is: Y = Y*. In the equation, Y is the production of the economy and Y* is the natural level of production of the economy.
Frank
yes you're correct Mr. Tedessa
Frank
What's a slope?
Tatiana Reply
change
Frank
rate of change,
Frank
😀😀 always happy. ....
Manjeck
interaction of demand and supply
Raka Reply
not know
Narayandutt
aggregate demand ko aur kin namo se Jana jata hai
Narayandutt Reply
aggregate demand ko kin namo se Jana jata
Narayandutt
Discuss briefly, the circular flow of income in a two-sector economy.
Kweku Reply
WHY DEVELOP COUNTRIES RELY ON DEVELOPED COUNTRIES?
Ben Reply
that is choice and want....
DJ
what is the determination of aggregate demand?
Maddy Reply
C+I consumption + investment
Rohit
AD= C+I+G+(X-M)
Rana
classical dichotomy and its components?
Romaisa Reply
what will happen to the demand curve when there is an inflation in an economy
Hamza Reply
From my view, I think the demand curve will shift inwards.
Bobo
now it depends on what kind of inflation it is, depending on the type of inflation the movement of the demand curve can be stated.
Munimu
yes it depends on the cause for inflation. if it caused by maybe an increase in money supply, the effect is neutral in the long term, therefore there are no effects on total output in the economy, except for an increase in price
Lucas
but short term in general i think you could expect the demand curve to shift inwards as consumers experience a decrease in real income
Lucas
source of capital for the sole trader
Dogbey Reply
borrowing from relatives, government grants, bank loans, personal savings, credit card etc.
Munimu
Suppose you are holding 2000 in a checking account and the price level decrease by 20 %how much it will affect your purchasing power and why
Iqra Reply
Hi Iqra, will answer your question soon.
Aleem
2000*0.2= 400 2000-400= 1600
Munimu
1600
Munimu
a price level decrease is deflation. it means you'll be able to afford to buy more with your 2000 and your real income becomes 2000÷(100-20)=2500
Lucas
the amount will decrease to 1600 and you can't be able to buy over this amount
Agogo
As an economist student discuss how the pandemic covid19 can affect the aggregate demand and aggregate supply thereby leading to decrease in GDP and standard of living of citizens of nigeria
Fadila Reply
pandemic covid19 has already resulted to recession among nations. Recession on the other hand, refers to a fall in aggregate demand due to low income, no or little savings, low productivity among firms, layoffs of workers and so on. currently, international trade is on the hold which has drastically
Okeoghene
affected the GDP and GNP of countries. This to a large extent has affected the purchasing power of consumers
Okeoghene
Hence the standard of living is questionable among nations especially among developing nations
Okeoghene
hi how can you help me?
qusai Reply
can you send me the notes
Mohd
hello is what are you talking about?
Mousa
unemployment and low inflation    .
Abdirizaq Reply
Structure/Organization Of The Federal Reserve
Abdirizaq
sorry guys in macroeconomics what is different between inflation and intrest rate? please example for pandemic related maybe?
Siyanda
hello
Ramu
Is this Aap for class 11 and 12 only not for graduation?
ankit Reply
yeah like for du MA entrance
VAISHALI
okay
ankit
Aree i m also asking
VAISHALI
for du MA entrance. u shouldn't rely on app. Go for SAURABH SIR notes. available on flipkart.
Saurabh
ohh thanks
VAISHALI
pleasure
Saurabh
ooh
ankit
hello...how can I get full notes?
DR

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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