Nov 05 2009
Understanding the Consumer Price Index – the Fed’s “Drawing Board”
Published by Jason Welker at 6:36 pm under CPI,Inflation,Macroeconomics
MV=PQ: A Resource for Economic Educators: Some Classroom Resources
Special thanks to Tim Schilling at MV=PQ blog for pointing out the Cleveland Fed’s interesting video series called the “Drawing Board”.
This video introduces the concept of Consumer Price Index as a measure of inflation in the United States, shows how CPI is calculated, and then goes into a bit more detail than perhaps the AP or IB student needs when it introduces a new method of measuring inflation used by the Fed called “median inflation”.
AP and IB students can benefit most from watching up to 4:12. In this first half of the video the CPI is defined, its measurement demonstrated, short-comings discussed and the “core CPI” explained.
Discussion Questions:
- Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
- What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
- What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
- Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
- Unemployment and inflation: understanding the Fed’s balancing act
- Economics in plain English: Understanding Argentina’s budget woes
- The price of a beer in Zimbabwe: $4,813,277 and rising, FAST!
- Supply and demand shifters and the price of pork in China
- Understanding the difference between progressive and regressive taxes
For a worldwide independent research for CPI along with data and methodology please see Numbeo. Hope it would be interesting as perhaps news story tip for your readers
. Thank you for your understanding!
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Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index?
Because CPI is the measuring of the price changes in all the goods and services. The measure of the different items allow a big picture of price level in the nation. The average number is the overall price changes.
What type of good gets a greater weights than others?
Our regular spending which are expensive, such as rent, will have greater weight than others, such as jewelries, or the purchase of sunglasses.
What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
CPI tracks the changes in overall price each month. The figure is often used to help to adjust costs of living, the amount of people social security is paid to, and to adjust how much taxes people should pay. Changes in the price level affect our spending, it changes the value of our money. For example, if the price of T-shirts skyrockets, and our income does not rise, we are not able to purchase as many T-shirts as we could. People may demand a rise in income so our life will be less affected by inflation.
What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
General price changes may not be accurate if one good's price change more than others and pull up/down the CPI, and it's not the general price changes if other goods' prices don't change as much.
Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
Food and energy prices often experience price swings and don't really represent the real general price level.
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1.Why does the Bureau of Labour Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
The BLS gives a higher weight to goods that consumers spend a larger proportion of their income on when compared to goods that not as many consumers purchase. For example, housing will have a higher weightage in comparison to luxury goods like jewellery. This is done to get a better picture of the spending of consumers.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
Since the CPI compares the value of a set amount of goods and services in one year to the value of the same amount of goods and services in the base year, it measures inflation or deflation.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
In many countries, consumers increasingly make use of discount stores and sales since they are able to obtain come goods and services at a lower price. These prices are lower than the ones used for the CPI calculations, and therefore the CPI would overstate the degree of inflation, making it seem worse than it is.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The oil prices are very volatile are subject to a lot of fluctuations within that year. Food prices are also easily influenced by the consumer’s demand and they can often experience fluctuations in price that have a big impact on the CPI. These changes in price are called relative price changes and they do not show inflation and so they are not included in the core CPI.
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Hey lzhang2,
I liked your response to the short coming of using the CPI to measure inflation rate, and I was wondering, do you think the introduction of new products, for example the replacement of video tapes by DVDs or changes in product quality cannot be represented by the CPI?
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Hi,
Definitely the quantity demanded would affect prices. However, I don't think consumer demand will make the prices of food fluctuate a lot because the demand will be somewhat constant.
Regarding the changes in product quality you posted on my question, I think it's very hard to include these changes in CPI as they are different products. What are your thoughts on this issue?
Lola
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I agree that stuff like rent take on a greater weight than others. However, I would also like to add it is mainly because those things take greater weight because they are necessities.
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1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
Bureau of Labor Statistic need to take an average in order to get a more accurate assessment by taking all price changes and divided it by the number of things. The type of goods that get a greater weight than others are necessities.
2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
Some of the purposes CPI serve are making the cost of living adjustment and adjustment to social security benefit and the amount of taxes paid. Changes in price level in an economy is important we need to gauge the federal reserve movement towards adjusting policy towards stable prices and full employment.
3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
The traditional method looks at the average which sometimes may be in danger of using volatile high or low prices in the calculation of CPI which is not an accurate assessment of inflation. By using the median price, it takes into account that extreme prices occur and it is not a general trend of where the prices are going.
4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
Spike in oil and food prices does not always mean a rise in inflation. It may just be a spike in the price of one good which can only be thought of as a relative price change. A shift in consumption of one good to another is not representative of all price change.
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1) Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
The BLS weights different weights according to the proportion of income spent on that good or sevice, the higher the percentage of income spent on a good the greater the 'weight'. Rent usually gets a very high weight as people spend a large proportion of their income on rent, however rent has a much lower weight in less developed countries where they struggle to pay for food and water and hence food would have a higher weight.
2) What are some of the purposes of the CPI figure serves? Why do we care about changes in the price level of an economy?
CPI is a measure of the cost of living for an average household, if inflation goes up then people will be worse off if their income do not increase at the rate of inflation. This will mean that they will buy less goods than before with the same amount of money. If the price level goes up due to demand-pull inflation then the government may need to increase direct taxes to reduce aggregate demand and this would mean that people have less disposable income.
3) What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
One short-coming is that one item that has had a extreme change in price- like the example of the price of tea- would give the wrong picture of the inflation rate as the all other items prices might have stayed pretty constant.
4) Why did the BLS decide to exclude oil and food prices from its "core CPI" figure?
The BLS decided to do this because food and oil prices are highly volatile meaning they fluctuate a lot in a short timespan and this would give misleading and inaccurate figures of the rate of inflation.
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@tdeol2
I generally agree with what you said I would just like to add to you answer for question 2, people care about the changes in the price level because it affects their standard of living. If inflation increases then they will buy less goods for the same price as they did before.
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1.Why does the Bureau of labor statistics weight different item included in the measure of the consumer price index? What type of good get a greater weights than other?
BLS weights different items because consumers spend a larger portion of their income on various items, for instance people spend much more money on rent than they do on clothes, therefore if the price of clothes increases dramatically it won‘t have the same effect as the increase of rent would.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI figure tracks how the price of goods and services chang from month to month and the figure is often used to help make the cost of living adjustments, and adjustments to how much money people are going to be paid in social security benefits and the amount of certain taxes you pay and among other things as well, however its not a really good measure of inflation from month to month, because a change in the price of one particular good does not infer inflation, for example if the demand for energy drinks for some reason increases dramatically, which results in a price increase, then that does not mean there is inflation.
3.What is one short coming of the traditional method used for measuring the inflation rate using CPI?
A short coming could include the example I mentioned above; i.e there could be a number of reasons for why the price of a good or service increases, which means it doesn‘t necessarily equate inflation, however this is something the CPI fails to show, as it only infers that there has been an inflationary increase or decrease of X%, even if there are alternative explanations for why certain product price levels have changed.
4.Why did the BLS decide exclude oil and food prices from its core CPI figure?
The BLS decided to exclude oil and food prices from it‘s core CPI figure because of the ‚‘‘price swing problem‘‘, which basically means that food and energy are always going to be subject to large volatile price swings, that in essence have absolutely nothing to do with inflation.
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Hi Sophie Zhou, I agree with all of your points; you wrote a very interesting post. What kind of necessities do you believe should weigh more than others? I think it sounds strange to categorize fuel as a necessity, although it technically is but then again it has been excluded from the core CPI figure anyway as it fluctuates so regularly in price levels. Do you believe that the federal reserve has the ability to create stable prices and full employment?
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1) Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index?
- Bureau of Labor Statistic need to take an average in order to get a more accurate assessment by taking all price changes and divided it by the number of things. The type of goods that get a greater weight than others are necessities.
2) What type of good gets a greater weights than others?
- Housing will have a higher weightage in comparison to luxury goods like jewelry.
3) What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
- Some of the purposes CPI serve are making the cost of living adjustment and adjustment to social security benefit and the amount of taxes paid. Changes in price level in an economy is important we need to gauge the federal reserve movement towards adjusting policy towards stable prices and full employment.
4) What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
- In many countries, consumers increasingly make use of discount stores and sales since they are able to obtain come goods and services at a lower price. These prices are lower than the ones used for the CPI calculations, and therefore the CPI would overstate the degree of inflation, making it seem worse than it is.
5) Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
- The BLS decided to exclude oil and food prices from it‘s core CPI figure because of the ‚‘‘price swing problem‘‘, which basically means that food and energy are always going to be subject to large volatile price swings, that in essence have absolutely nothing to do with inflation.
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Hi(:
I agree with all of your answers in regards to all the questions. People care about the changes in the price level because it affects their standard of living. Great post!
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The Bureau of Labor Statistics measures how much of a persons income goes toward a particular purchase, so that CPI can be as accurate as possible. Goods that are fundamentals or basics to the average lifestyle get greater weights, for example a house payment is more crucial than a jewelry purchase. Home payments would also typically be more expensive, therefore earning a larger weight.
CPI tracks how price of overall expenditure changes each month. The figure is often used to help make adjustments the cost of living, tax payment and social security. It’s always better to be able to anticipate inflation, and these measurements provide information to do so.
CPI doesn’t measure inflation month to month well, because inflation is a general rise in all the prices of things we buy, not just the rise in the price of one good or service, or a simple shift in consumption patterns (called price swings).
Food and energy prices are always going to be subject to large price swings, which we learned is unrelated to inflation. These really volatile items need to be excluded in order to ensure maximum efficiency of the CPI measuring inflation.
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@dnyanzi
I thought it was very interesting how you included the economic status of the country as part of what determines CPI weighting. I hadn't thought of how location, income and customs of an area would change the "average" consumer profile, and therefore shift the weights in each category.
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Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
Goods that are consumer more will have a greater weight than others. For example, rent will have a greater weight than something like jewelry because rent is paid by most people unlike the consumption of jewelry.
What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI is able to tell us the employment rates, cost of living, and taxes. These all effect us as we are the ones who have to pay as well as make money to pay for ourselves and our families.
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What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
Tea was used as an example to look at the short-coming of the traditional method. If it was said that there would a 25 year increase in the time you would be alive if you drank four cups of tea a day, the demand for tea would increase. Thus, the price would increase. This is one product that could effect inflation rate for a whole country in the short run. This creates an inaccurate inflation rate for a country.
Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The BLS decided to exclude oil and food prices for its "core CPI" figure because these prices are always fluctuating. Because of the changes in these prices all the time, it doesn't give the CPI accurate figures.
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1.Why does the Bureau of Labour Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
They stress the relative importance of each category of goods and give a higher weight to goods that consumers spend a larger proportion of their income, and a lower weight to goods and services that are less important and less consumed. Housing will be given a more important weight in comparison to luxury goods like jewellery. This technique will give us a better picture of the spending of consumers.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI compares the value of a representative amount of goods and services in one year to the value of the same goods and services in the next year, and calculate inflation and deflation depending on the figures.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
CPI calculations overstate the degree of inflation, making it seem worse than it is, when consumers increasingly make use of discount stores and sales since they are able to obtain come goods and services at a lower price. They have lower prices then the ones used for the CPi calculations.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The oil prices are very volatile and change alot during one year. Food prices are also quite volatile and are easily influenced by consumer’s: they can often experience some fluctuation during one year, which will make a big impact on the CPI stats. This is why some goods such as these are not not included in the core CPI.
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Hey I agree with all your answers! For the last question however, I would of mentioned that goods such as oil and food fluctuate alot in one year, making them inconsistent, hard to put alot of weight on in the core of CPI! Well done
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Hi!
I was interested that you made it apoint to say that every price that changes in a country doesn't mean that there is a change in inflation. I agree with this fact. Some prices, as stated in the video, change frequently.These include oil and food. They shouldn't be included in these calculation as they don't give the country an accurate reading of the inflation in the long run (only in the short run). The short run could be dominated by one group of goods as seen with the tea example.
Thanks!
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Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
BLS gives a higher weight to goods that consumer spend a larger part of their income on.While CPI is the measuring of the price changes in all the products. Products that are demanded more will have a greater weight than others. Example such as housing will have a greater weight in comparison to jewelry.
What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
Since CPI compares the values of good and service in one year to another year, it is basically measuring inflation and deflation.
What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
If the product changes in a great way, thus affecting the CPI, it is not general price changes if other products doesn’t change as much.
Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
Because food and oil are very unstable as to fluctuations within a year, they are easily influenced therefore does not really represent the real general price level.
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@bhejaichon2
I think all your statements are valid, especially where is says that oil and food prices for it's core CPI figure because of the price swing program. I really liked this statement. Yet, i have a questions, what do you think caused this "price swing problem"? do you think that if it deals with demand as you said, would it be possible to reduce the number of the product?
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1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
The bureau of Labor statistics weighs different weights according to the proportion of income spend on that good or service, the highter the percentage of income spent on a good the greater the “weight”. (This was taken from one of the answers written by someone else). Rent usually gets a very high weight as people spend a large proportion of their income on rent, however rent has a much lower weight in less developed countries where they struggle to pay for food and water, hence food has a higher weight.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI compares different values of set amount goods and services in one year to the value of the same amount of goods and services in the base year, it measure inflation and deflation.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
One short-coming of the traditional method used for measuring the inflation rate using CPI is the one where the CPI would overstate the degree of inflation, making it seem worse than it really is.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
They decided to exclude oil and food prices from its core CPI figure due to the fact that oil and food prices fluctuate, therefore these are volatile. Food prices are influenced by the consumers demand. These two are not included in the CPI for these reasons.
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Good answers, I especially agree on that last question – food and oil are such fluctuating products. It is all due to the demand of consumers however this is a debatable subject as for petrol even though it fluctuates a lot – the prices are set by the suppliers due to economical reasons.
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Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
The BLS weights different items included in the measure of the CPI differently. This is because there are some goods; such as housing, that consumers spend a greater proportion of their income one, relative to others; such as clothing.
What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI allows the measure of the value of goods and services in different years; and therefore compare values and can recognize inflation or deflation. We care about changes in the price level in an economy as it could reflect slight inflation or deflation; and government/central bank intervention can then attempt prevent the situation from worsening.
What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
Inaccuracies when collecting data (or the use of anomalies in the sample data collected); as well as the use of different "baskets" in differing countries can make CPI values of the countries inaccurate; and make it more difficult to accurately compare them to one another. Additionally, the presence of discounts in many countries (which attract more sales) could seem to reflect a price change when collecting the data for the CPI; when, in fact, no price change has occurred.
Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The BLS decided to exclude oil and food prices from its "core CPI" figure, because they are subject to relative price changes. This means that the prices of oil and food are volatile; and change based on factors such as fluctuating consumer demand, and do not necessarily reflect a case of inflation.
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Hey lzhang2,
I enjoyed reading your response, especially the one to the third question (concerning the purpose of the CPI figure, and its importance). Your response was more detailed than mine in describing the importance of the CPI and the consequences of inflation/deflation; and more accurately outlined its significance.
Thanks
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Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets greater weights than others?
The Bureau of Labor Statistics weighs different items in order to calculate a more accurate inflation level. Consumers spend different amount of income on different items. For example the amount spent on housing will be much greater than the amount spent on books. It’s important to measure different weights, so we can distinguish between overall price level change or just a relative price level change.
What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
CPI figures can be compared year to year, so the changes in price levels over a period of time can be noted. We care about these changes because they affect our standard of living, and can predict or assume the amount of goods and services we will be able to buy at different inflation levels.
What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
Discount stores make prices lower than they are in reality; this overstates the level of inflation, making the inflation seem even worse.
Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The BLS decided to exclude these goods because their prices are unstable and volatile. Their price changes too often, and therefore does not reflect the true face of inflation.
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Hi Igade 2, good response to the topic. I liked how you gave a more descriptive asnwer to question 3, which I was a bit stuck on, and you also mentioned 'baskets' which i forgot to do, but it is very important. Sales always please me, but this topic just made me realize what a trick they play in the economy. Good post!
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The weight given to goods within the index are intended to reflect their importance in the average consumer’s income; perhaps it could even be described as the inelasticity of their demand, to an extent. If a good is seen as essential for maintaining one’s standard of living and most families regularly purchase it, then a rise in the price of this good is likely to have a greater effect on the average household than the rise in the price of a good they have never heard of. For this reason, the inflation rate calculation reflects the demand for different goods to give a more accurate impression of the impact that the average household will face.
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CPI is the most commonly-used method of measuring inflation, which can be an important indicator of the health of an economy. Furthermore, CPI can often give firms an idea of the wage rises they will need to provide in any given year; workers often expect a pay rise per annum in order to maintain their purchasing power.
It would take into account a price change that may not have been sustained; for example, if there had been a sudden drastic increase in demand for a product which, despite having a low weighting, managed to change the CPI by a significant amount purely based on the extent to which the price rose, then this would be reflected as inflationary. However, it is not really a sustained rise in the general price level.
These markets are volatile, and prices of these goods can change without being sustained, e.g. when food comes in and out of season, or when there is an oil shortage – the price of oil may then decrease if a new, bountiful source is discovered.
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Reading your comment on jewellery just made me think about how there must be a greater effect on the CPI if the good in question accounts for a very large proportion of consumers' income… however, there would have to be an increase in the prices of many cheaper-priced goods to equal the same change. However I expect this will be taken into account in deciding which products are weighted more heavily.
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1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
They weight different items so that the index accurately represents what we spend our money on, and what is most important to the buyer. Something that people spend more money on will have a greater weight in the index. This ensures that some minor item, for example hair gel, cannot have as large an effect on the CPI, because it doesn’t affect people as much as a rise in rent, for example.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
The CPI leads to us making changes in cost of living, social security, and taxes. We care about changes in price level because they affect consumers who need to pay these prices; when inflation increases and prices go up, people will have to spend more money on the same products, meaning they have less money left over, which affects them financially.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
The problem with measuring inflation with the CPI is that it can be pushed by price swings in the short run. If one item (the video uses the example of tea) rises so much in price that it drives up the CPI, it can affect the measured inflation rate, even though it is not a rise in the general price level, but rather a spike in the cost of one thing we buy.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
These products are always subject to large relative price swings, and so they distort the view of inflation. By discluding these products, the numbers will see a more stable increase and so will more accurately reflect inflation, rather than just relative price changes.
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Hi kedwards!
You mentioned a really good point about anticipating inflation… As we have learned, there are many more problems that arise with unanticipated inflation than anticipated, because we are not able to plan for the future. So, by tracking CPI we have a greater chance of recognizing trends and predicting future inflation, which is important for the economy. Thanks for mentioning that!
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ksad
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1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
The BLS gives a higher weight to goods that consumers spend a larger proportion of their income on when compared to goods that not as many consumers purchase. For example, housing will have a higher weightage in comparison to luxury goods like jewelry. This is done to get a better picture of the spending of consumers.
2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
Since the CPI compares the value of a set amount of goods and services in one year to the value of the same amount of goods and services in the base year, it measures inflation or deflation.
3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
In many countries, consumers increasingly make use of discount stores and sales since they are able to obtain come goods and services at a lower price. These prices are lower than the ones used for the CPI calculations, and therefore the CPI would overstate the degree of inflation, making it seem worse than it is.
4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
The oil prices are very volatile are subject to a lot of fluctuations within that year. Food prices are also easily influenced by the consumer’s demand and they can often experience fluctuations in price that have a big impact on the CPI. These changes in price are called relative price changes and they do not show inflation and so they are not included in the core CPI.
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I thought that your post was very interesting. I really like how you mentioned that the economic status of a specific country plays a part in on determining CPI weighting. Good post!
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Discussion Questions:
1.Why does the Bureau of Labor Statistics weigh different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
Consumer Price Index (CPI) is used to calculate price changes over time. The good that gets a greater weight would depend on their elasticity whereby the more inelastic the good is, the greater the weight. Usually these goods are necessities in the consumer’s lives.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
Consumer Price Index (CPI) can be used to measure the changes in inflation rate or purchasing power of consumers. On top of that, it is usually used in helping modify the cost of living, social security, tax etc.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
The CPI figure is a fixed-weight price index. As such, it would overstate the adjustment in the cost of living. This is due to the structural changes that take place in the long run, the supply change due to the response of consumers, the assumption of a ‘typical’ household, and the fact that it does not take into account commodity and producer prices.
4.Why did the BLS decide to exclude oil and food prices from its “core CPI” figure?
Oil and food prices are commodities. This means that the market price of these two items fluctuates without warning. Therefore, there is a large price swing whenever a factor affecting price changes and will These products are always subject to large relative price swings, and so they will mislead inflation. This will result in an unstable increase in inflation.
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Hi sjowett2,
In reference to your response to question 4, not only are they easily affected by consumers but external factors that humans have no control over as well. Take weather as an example of a factor, there is no say as to when bad weather will strike and how much it will affect corps or nature in general.
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1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
Different products are weighed differently in order to have a more accurate index, to see which products are more used and valued by the consumers. For example, something like housing would have a much, much higher weight in the index, versus a product like hot tubs.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
During inflation, we change the cost of living, and of many other products that are used everyday. These price levels are important because they directly affect the consumer and the consumers spending capacity, and the consumer's money that is left over after paying for all the essential products…which will lead to changes in AD.
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3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
As we saw in the video, the CPI can have inaccurate representation if one product suddenly becomes more popular, like in the video tea was used as an example…this kind of data can ofput the data that is being collected and it can be misleading to the economists.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
These products are constantly changing values so it is better to keep them seperate from the core CPI, because than the CPI will more acurately reflect the inflation rate (with the oil and food prices included, relative price changes would be skewing results)
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Hey lgade 2
A very thorough response to question 3…I didn't even think to include baskets into my response. As well you brought up discounts which could also skew the data (make it seem like a price change when really there was no price change), which is also a good example!
Nadiya
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1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets greater weights than others?
The Bureau of Labor Statistics weight different items included the measure of the consumer price index because different products are given different weightings. For example, housing will have a larger payment compared to jewelry. Hence, having taken all measures in account, the Bureau of Labor Statistics will then take the weighted average –by adding up the total value of the changes and then dividing by the number of items in the group. Just as the video mentioned, housing gets greater weights than jewelry, which is a luxury, good.
2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
CPI measures the changes in the price level of consumer goods and services purchased by households. Therefore, it is important to us because people can see if inflation or deflation has happened or is going happen through the CPI figures.
3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
CPI is often a long-term measurement. Therefore it is not perfect for measuring monthly price changes but better for long term inflation.
4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
BLS decided to exclude oil and food prices because those factors are subject to large relative price swings that usually have nothing to do with inflation. Without the two factors, CPI would be more accurate than if those two factors were included.
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Hi!
I think you reflected well on these questions. Especially one question 3 where you mentioned that "By using the median price, it takes into account that extreme prices occur and it is not a general trend of where the prices are going. "
Good Job!
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