The Cost of Living: The Consumer Price Index and
The Cost of Living: The Consumer Price Index and
The Cost of Living: The Consumer Price Index and
The three main categories are finished goods, intermediate materials, and
crude materials, although there are subcategories within each of these
categories.
Inflation refers to a situation in which the economy’s overall price level is
rising.
The inflation rate is the percentage change in the price level from the
previous period.
The Central Bank of Malaysia (Bank Negara Malaysia) recently reports the CPI
each month - Monthly Statistical Bulletin. It is used to monitor changes in
the cost of living over time.
http://www.bnm.gov.my/index.php?ch=en_publication_catalogue
&pg=en_publication_msb&mth=10&yr=2014&lang=en&eId=box1
The CPI market basket shows how a typical consumer divides his or her money
among various goods and services.
The CPI market basket for 2010 (based year) shows that most of a consumer’s
money goes toward “Food & non-alcoholic beverages”, “Housing, water,
electricity, gas & other fuels”, and “Transport”.
Substitution Bias
• The basket does not change to reflect consumer reaction to
changes in relative prices.
• Consumers substitute toward goods that have become relatively
less expensive.
• The index overstates the increase in cost of living by not
considering consumer substitution.
Nominal GDP
GDP deflator = 100
Real GDP
The statistical agency calculates other prices indexes:
• The index for different regions within the country.
• The producer price index, which measures the cost of a basket of
goods and services bought by firms rather than consumers.
The GDP deflator reflects the prices of all goods and services
produced domestically, whereas...
…the Consumer Price Index reflects the prices of all goods and
services bought by consumers.
15
10
0
1974 1979 1984 1989 1994 1999 2004 2009
Indexation
When some dollar amount is automatically corrected for inflation by law
or contract, the amount is said to be indexed for inflation.
*So inflation by itself does not necessarily reduce ones purchasing power.
Unanticipated inflation, on the other hand, may have large effects, depending,
among other things, on how much indexing to inflation there is.
Real interest rate - The difference between the interest rate on a loan and the
inflation rate.
Interest rates tend to rise with anticipated inflation. When interest rates are
high, the opportunity costs of holding cash outside of banks is high.
In this belief, our elected leaders have vigorously pursued policies designed to
stop inflation.