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    Measuring Inflation and Deflation

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    Sara Abouhilal
    The consumer price index (CPI) is used to measure inflation and deflation. It tracks the price of a basket of goods and services typically purchased by households over time. The CPI compares the cost of this basket in the current year to a base year to determine the percentage change in prices. A positive percentage change indicates inflation, while a negative change signals deflation. However, the CPI may not accurately reflect the inflation experienced by different income groups or account for changes in consumption patterns, product quality, or new products. To address this, economists also measure a core inflation rate that excludes volatile food and energy prices. The producer price index tracks inflation from the perspective of producers and can help predict future consumer price inflation.

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    Measuring Inflation and Deflation

    Uploaded by

    Sara Abouhilal
    108 views24 pages
    The consumer price index (CPI) is used to measure inflation and deflation. It tracks the price of a basket of goods and services typically purchased by households over time. The CPI compares the cost of this basket in the current year to a base year to determine the percentage change in prices. A positive percentage change indicates inflation, while a negative change signals deflation. However, the CPI may not accurately reflect the inflation experienced by different income groups or account for changes in consumption patterns, product quality, or new products. To address this, economists also measure a core inflation rate that excludes volatile food and energy prices. The producer price index tracks inflation from the perspective of producers and can help predict future consumer price inflation.

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    The consumer price index (CPI) is used to measure inflation and deflation. It tracks the price of a basket of goods and services typically purchased by households over time. The CPI compares the cost of this basket in the current year to a base year to determine the percentage change in prices. A positive percentage change indicates inflation, while a negative change signals deflation. However, the CPI may not accurately reflect the inflation experienced by different income groups or account for changes in consumption patterns, product quality, or new products. To address this, economists also measure a core inflation rate that excludes volatile food and energy prices. The producer price index tracks inflation from the perspective of producers and can help predict future consumer price inflation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    108 views24 pages

    Measuring Inflation and Deflation

    Uploaded by

    Sara Abouhilal
    The consumer price index (CPI) is used to measure inflation and deflation. It tracks the price of a basket of goods and services typically purchased by households over time. The CPI compares the cost of this basket in the current year to a base year to determine the percentage change in prices. A positive percentage change indicates inflation, while a negative change signals deflation. However, the CPI may not accurately reflect the inflation experienced by different income groups or account for changes in consumption patterns, product quality, or new products. To address this, economists also measure a core inflation rate that excludes volatile food and energy prices. The producer price index tracks inflation from the perspective of producers and can help predict future consumer price inflation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 24

    MEASURING INFLATION

    AND DEFLATION
    For dummies

    THE CONSUMER PRICE


    INDEX

    Straight from IB GUIDE:


    *Explain that inflation and deflation are typically
    measured by calculating a consumer price index
    (CPI), which measures the change in prices of a
    basket of goods and serviced consumed by the
    average household

    Price index: measure of average


    prices in one period relative to
    average prices in reference period
    called a base period
    One of the most commonly used
    price indices to measure inflation is
    CPI

    CPI-what is it, how its


    constructed
    CPI is a measure of the cost of living, or the cost
    of goods and services purchased by the typical
    household in an economy.
    Its constructed by a statistical service in each
    country: it creates a hypothetical basket of
    goods that are consumed by a typical household
    during the year (price x quantity=total value of
    basket). Then the value of the same basket is
    calculated for subsequent years. CPI shows how
    the value of the basket changes from year to
    year by comparing its value with the base year.

    SUMMING UP
    The consumer price index (CPI) is a measure
    of the cost of living for the typical household
    and compares the value of a basket of goods
    and services in one year with the value of the
    same basket in a base year. Inflation( and
    deflation) are measured as a percentage
    change in the value of the basket from one
    year to another. A positive percentage
    change indicates inflation. A negative
    percentage change indicates deflation.

    PROBLEMS WITH CPI

    *Explain that different income earners may


    experience a different rate of inflation when
    their pattern of consumption is not
    accurately reflected by CPI
    *Explain that inflation figures may not
    accurately reflect changes in consumption
    patters and the quality of the products
    purchased

    ,,Typical basket problems

    Different rates of
    inflation for different
    income earners

    Different rates of
    inflation depending
    on regional or cultural
    factors

    Changes in
    consumption patters
    due to consumer
    substitutions when
    relative price changes

    Changes in
    consumption patterns
    due to increasing use
    of discount stores and
    sales.

    Changes in
    consumption patterns
    due to introduction of
    new products

    Changes in product
    quality

    International
    comparisons

    Comparability
    over time

    THE CORE RATE OF


    INFLATION

    *Explain that economists measure a


    core/underlying rate of inflation to eliminate the
    effect of sudden swings in the prices of food and oil

    Highly volatile prices may


    give rise to misleading
    interpretation about inflation.
    SOLUTION: Dont include
    products with highly volatile
    prices in CPI (products such
    as food and energy)

    THE PRODUCER PRICE


    INDEX

    *Explain that a producer price index measuring


    changes in the prices of factors of production may
    be useful in predicting future inflation.

    Producer price index (PPI)- several


    indices of prices received by producers
    of goods at various stages in the
    production process for example:
    - PPI for inputs
    - PPI for intermediate goods
    - PPI for final goods
    PPI measures price level changes from
    the point of view of producer rather
    than consumers.

    NOW U KNOW ALL ABOUT


    MEASURING THE RATE OF
    INFLATION AND DEFLATION.
    *magic*

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