Consumer Price Index Lecture Notes

Flashcards on the Consumer Price Index (CPI), its calculation, and related concepts.

Consumer Price Index (CPI)

Measures of the overall level of prices and the overall cost of goods and services Bought by a typical consumer

Fix the basket

Select the goods & services most important to the typical consumer

BLS.gov

Bureau of Labor Statistics

Find the prices

At each point in time for calculating the CPI

Compute the basket’s cost

Same basket of goods & services, isolate the effects of price changes

Expenditures in year 1

Price in year 1 X Quantity in year 1…Added together for all goods and services!

Base year

Benchmark

CPI in year 2

Expenditures on basket of g&s in current year/expenditures in base year X 100

CPI in year 1

Expenditures on basket of g&s in year 1/expenditures in base year X 100

Inflation rate in year 2

CPI in year 2 - CPI in year 1/ CPI in year 1 X100

Substitution bias

Prices do not change proportionately, consumers substitute toward goods that have become relatively less expensive

Introduction of new goods

More variety of goods

Unmeasured quality change

Changes in quality of goods

Producer price index, PPI

Measure of the cost of a basket of goods and services bought by firms

PPI predicting CPI

Changes in PPI are often thought to be useful in predicting changes in CPI