Consumer Price Index and Inflation Measurements

This set of flashcards covers key concepts related to the Consumer Price Index, various inflation measures, and methods of calculating inflation adjustments.

Consumer Price Index (CPI)

A measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases.

Substitution bias

An inflation rate calculated using a fixed basket of goods that tends to overstate the true rise in the cost of living because it does not consider that consumers can substitute away from goods whose prices rise considerably.

Quality/new goods bias

An inflation measure that overstates the true rise in cost of living as it does not account for improvements in quality of existing goods or the invention of new goods.

Core inflation index

An inflation index that takes the CPI and excludes volatile economic variables, like energy and food prices, to reflect underlying price trends affecting the cost of living.

Producer Price Index (PPI)

A measure of inflation based on prices paid for supplies and inputs by producers of goods and services.

International Price Index

A measure of inflation based on the prices of merchandise that are exported or imported.

Employment Cost Index

A measure of inflation based on wages paid in the labor market.

GDP deflator

A measure of inflation based on the prices of all components of GDP including consumption, investment, government, and exports minus imports.

Inflation adjustment calculation

The method of converting a past price or income into its current dollar equivalent using the CPI to compare purchasing power over time.

Federal minimum wage

The legal minimum hourly wage that can be paid to workers, which was $3.35 in Aug 1981 and $7.25 in Aug 2022, reflecting the impact of inflation.