Sep 27 2012

Understanding the Consumer Price Index – the Fed’s “Drawing Board”

Published by at 8:36 am 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:

  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?
  2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
  3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
  4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

112 responses so far

112 Responses to “Understanding the Consumer Price Index – the Fed’s “Drawing Board””

  1. Mladenon 07 Nov 2009 at 12:16 am

    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!

  2. lzhang2on 09 Apr 2012 at 6:54 pm

    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.

  3. tdeol2on 12 Apr 2012 at 4:01 pm

    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.

  4. tdeol2on 12 Apr 2012 at 4:05 pm

    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?

  5. lzhang2on 12 Apr 2012 at 6:03 pm

    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

  6. sophie zhouon 13 Apr 2012 at 2:28 am

    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.

  7. sophie zhouon 13 Apr 2012 at 2:29 am

    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.

  8. dnyanzion 13 Apr 2012 at 2:42 pm

    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.

  9. dnyanzion 13 Apr 2012 at 2:52 pm

    @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.

  10. alifsigridardottiron 15 Apr 2012 at 12:53 am

    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.

  11. alifsigridardottiron 15 Apr 2012 at 12:56 am

    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?

  12. bhejaichon2on 15 Apr 2012 at 4:25 pm

    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.

  13. bhejaichon2on 15 Apr 2012 at 4:29 pm

    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!

  14. kedwardson 15 Apr 2012 at 8:09 pm

    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.

  15. kedwardson 15 Apr 2012 at 8:12 pm

    @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.

  16. nvirani2on 16 Apr 2012 at 6:20 am

    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.

  17. nvirani2on 16 Apr 2012 at 6:21 am

    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.

  18. sjowett2on 16 Apr 2012 at 6:24 am

    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.

  19. sjowett2on 16 Apr 2012 at 6:26 am

    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 :)

  20. nvirani2on 16 Apr 2012 at 6:29 am

    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!

  21. axu2on 17 Apr 2012 at 3:07 am

    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.

  22. axu2on 17 Apr 2012 at 3:21 am

    @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?

  23. spouloson 17 Apr 2012 at 6:08 am

    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.

  24. spouloson 17 Apr 2012 at 6:09 am

    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.

  25. lgade2on 17 Apr 2012 at 7:07 am

    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.

  26. lgade2on 17 Apr 2012 at 7:11 am

    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

  27. simona cajkaon 17 Apr 2012 at 1:28 pm

    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.

  28. simona cajkaon 17 Apr 2012 at 1:46 pm

    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!

  29. Arthi Nachiappanon 17 Apr 2012 at 3:40 pm

    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.

  30. erweron 17 Apr 2012 at 3:41 pm

    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.

  31. Arthion 17 Apr 2012 at 4:01 pm

    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.

  32. Monique Ton 20 Apr 2012 at 2:27 am

    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.

  33. Monique Ton 21 Apr 2012 at 2:48 am

    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! :)

  34. Jackon 24 Apr 2012 at 2:30 am

    ksad

  35. Jackson Truexon 24 Apr 2012 at 2:32 am

    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.

  36. Jackon 24 Apr 2012 at 2:33 am

    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!

  37. Mirren Mecathumon 24 Apr 2012 at 2:52 pm

    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.

  38. Mirren Mecathumon 24 Apr 2012 at 2:55 pm

    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.

  39. Nadiya Son 29 Apr 2012 at 11:41 pm

    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.

  40. Nadiya Son 29 Apr 2012 at 11:41 pm

    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)

  41. Nadiya Son 29 Apr 2012 at 11:45 pm

    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

  42. Debbie Pon 20 May 2012 at 1:11 am

    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.

  43. Debbie Pon 20 May 2012 at 1:14 am

    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!

  44. nikolay@pamojaon 19 Apr 2013 at 4:22 pm

    1. The BLS weighs different things differently because the amount of income spent is different. This is important because if the price of an obscure good such as “model flux capacitors” will only affect a few people as well the amount of income spent on those goods is a very small amount. Whereas the amount of money spent on rent is usually a high amount and so a change in rent will affect the population a lot more. Thus to compensate for the uneven amount of money and the varying importance of goods the averages are also wighted.

    2. The CPI shows long term trends in inflation. It is important to know long term trends as well as current fluctuations because wages, social security, and even taxes need to be adjusted for inflation. If they weren’t then the transaction benefits one party more then the other. For instance if wages are not adjusted for inflation then as the cost of living goes up the amount of things a consumer can by becomes less, as their money loses its purchasing power.

    3. The traditional method is greatly affected by retaliative price change. This is when a natural change in the price of a good is interpreted as a change in the inflation rate. This is especially common in the markets of goods which are volatile by nature such as energy and food.

    4. The BLS decided to not include oil and food from the core inflation rate because both goods are prone to change their price a little haphazardly, which throws the inflation rate off. While this is considered implicit in the CPI the core CPI is by definition CPI without any volatile goods. Therefor oil and food prices cannot be a part of the core CPI by definition.

    @# Debbie P
    I like your critique of that post, especially the part where you citited what you were refering to “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. “”

  45. Yada Pruksachatkunon 19 Apr 2013 at 10:50 pm

    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?

    As other people have mentioned,the Bureau of Labor Statistics weight different items because people spend different amounts of money on different types of goods. In order to accurately show how much an impact inflation in a certain good would have on the average consumer, the CPI puts the difference in importance into account. The more important (clothing, housing, education), the bigger the weighting.
    In the normal consumer price index, very volatile goods such as oil and food are included and are weighted very highly. Even though a high proportion of the average consumer income is spent in those goods, their prices are also the fastest and most extreme in price changes, and are not an accurate representation of the price level changes of the entire economy. For example, if the price of oil raises 14.4%, it might increase the CPI and make it seem as if there has been a steep inflation rate, when it actuality, only one type of good raised in price while others may stay the same. That is why the Bureau has removed oil and foods in their Core CPI. The Bureau weighs goods that are in the median of price changes in order to eliminate the possibility of relative price change.

    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 the CPI figures is to who the rate of inflation over a period of time, to use in calculating taxes or wage raises or decreases, and social security benefits. CPI, an indicator of inflation, is used by central banks to gauge whether or not they should raise interest rates, and by the government in fiscal policies.
    We care about changes in the price level of an economy because if the price level goes up, the real value of our money will go down unless we get a wage increase that matches the interest rate. In that case, we will lose no real value. However, we will not be able to buy as much as we could before the price level increase. Also, if we loaned out money to someone, we would find a decrease in real value of that loan.
    On the other hand, if price levels decrease, if you had borrowed from the bank or someone else, the real value of the loan would skyrocket and you might not be able to pay that person back.

    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 in measuring the inflation rate is not only the volatility of some of the goods considered for CPI, but also that the more a consumer strays from the average consumer habits, the less meaningful and accurate the CPI is for them.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    I have already answered this in an earlier question.

    Comment to #nikolai@pamoja
    I really like how you bought in the model flux capacitors to bring in more economics terms. I’m just curious, and this can be an open question to everyone, how helpful is CPI to you? If not very helpful, what do you use instead?

  46. Mkhosoon 20 Apr 2013 at 9:54 am

    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 depending on the proportion of income a household spends on them. Rent for example usually figures as a large deduction from this monthly income, while the purchase of pencils represents a much smaller deduction from this income. Therefore, the BLS weights the items where a larger proportion of household income is spent on with greater weight, and vice versa.

    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 used to make cost of living adjustments, social security adjustments and tax rate adjustments to assure the maintenance of the prior status quo and ensure economic equality.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    A substantial relative price change in one could with significant weight in the CPI can pull or push that CPI in either a positive or negative direction. This tendency for one good being able to distort the entire CPI measure can oftentimes make it unreliable, especially when it includes and weights goods with highly variable and seasonal costs.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Because oil and food prices are highly variable due to a myriad of complex factors. This variability can distort the CPI and make it an unreliable indicator for the overall inflationary state of the economy from an individual’s perspective.

  47. Mkhosoon 20 Apr 2013 at 9:57 am

    @Jackson Truex
    I like how you point out the ‘discount/sale’ factor when it comes to consumption. That is a really good point, but I wonder, how could it possibly be factored into the CPI?

  48. aleeon 20 Apr 2013 at 7:34 pm

    1. Why does the Bureau of Labor Statistics weight different items in the measure of the consumer price index? What type of good gets a greater weight than others?
    The BLS weighs different items in the measure of the CPI because people spend different proportions of their incomes on certain purchases. A good that a person’s income goes more towards would have a greater weight than others (i.e. rent vs. jewelry).

    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 can be used to make adjustments to the cost of living, social security benefits, and taxes. We care about changes in the price level in an economy because that changes how much our money is worth.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    There may be a spike in the cost of one thing we buy (relative price change) and not a general raise in the price level (inflation).

    4. Why did the BLS decide to exclude oil and food prices from its “core CPI” figure?
    The BLS decided to exclude oil and food prices because they were subject to large price swings.

  49. aleeon 20 Apr 2013 at 7:44 pm

    Hello #Debbie P!
    You mentioned that the CPI is a long-term measurement, but isn’t the CPI measured monthly? Price swings are what can be measured in the long-term.

  50. hteohon 21 Apr 2013 at 7:48 am

    MY RESPONSE:

    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?

    The Bureau of Labor Statistics weight different items because people spend different amount of money on different types of goods. To accurately show how much an impact of inflation on a certain good on an average consumer, it is important to notice the goods and services that are consumed that are more important in comparison to others since they take up a larger share of consumers’ income. Hence, the categories are given a weight in the index to reflect their importance in the average consumer’s income. Hence, the more important the good or service, the bigger the weighting will be. In a consumer price index (CPI), energy prices and food are included and weighted very highly. A high proportion of the average consumer income is spent on those goods. If prices of energy or food increase, the CPI increases. This might cause a steep inflation rate, however it is only one type of good/service that is raised in price and others may have stayed the same. So, this is the reason why Bureau has excluded food and energy prices, as they are always going to be subject to large price swings and have nothing to do with inflation. Like for example, oil prices increase dramatically in a year then decreased in prices in the next year. This will have a dramatic effect on the CPI, which is why excluding volatile items is a good idea. So in conclusion, to eliminate the possibility of relative price changes, the Bureau weighs goods that are in the median of price changes.

    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 figures are often used to make cost of living adjustments and adjustments to how much people are going to pay for social security benefits and the amount of certain taxes people pay etc. However, the measurement of inflation may not be an accurate measure. This is because a change in the price of one particular good does not infer inflation. For example if the demand for ice cream increases dramatically, which results in prices to increase, it doesn’t mean that there is inflation. We care about changes in the price level in an economy because it affects us. Like if the price level of an economy increases, it means that the real value of our money will go down. Hence, causing our spending habits to change because we will not be able to buy as much as we could before there was an increase in price level. Also, the redistribution effects, if we lend money to someone and there is an increase in price level, the real value of the loan would decrease. However, earners of income pegged to inflation will benefit. Losers will include savers (when inflation increases more than interest rates), people who earn fixed incomes and holders of cash. Also, changes in price level in an economy create uncertainty for investors and consumers hence causing economy growth to decrease. Changes in price level also affects international competitiveness. When there is an inflation, it hurts/decreases exports, which then decreases aggregate demand and decrease economic growth. This may also lead to more unemployment. In conclusion, we care about changes in the price level in an economy because it affects different stakeholders in different ways, and so the CPI figures is used to help make cost of living adjustments, adjustments to how much people are going to pay for social security benefits and the amount of certain taxes people pay etc.

    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 inaccuracies of data. Selected basket of goods are only a representation of spending habits of the typical household, so this may not represent the spending habits of the whole population as everyone has different spending habits. There may be variations in regional rates of inflation within a country. Regional figures are published but national figure is more widely used, hence it may not be an accurate reflection for a particular area. It is impossible to collect the prices of all items bought by all households in all possible locations so samples are taken in selected cities and outlets. The layers of sample can lead to inaccuracy. So, the larger the sample, the more accurate the results will be. However this may be time consuming and costly. Another short-coming of the traditional method used in measuring the inflation rate is the volatility of some of the goods that are considered for CPI. Like I have mentioned above, the increase in prices of a particular good drastically can affect the rate of inflation, but it doesn’t mean that there is an inflation because these goods are subject to large price swings which have nothing to do with inflation.

    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 its “core CPI” figure because they create the “price swing problem”, which means that food and energy are always going to be affected by large volatile price swings hence causing inflation measurements to be inaccurate since those price changes have nothing to do with inflation.

    MY COMMENT:

    Comment on # YadaPruksachatkun:
    Great answers!! You have answered the questions really well and applied the concepts of CPI really well. I believe that excluding oil and food prices from the core CPI is a good idea because it would avoid inaccuracy in the measurements. Like when food prices increase drastically, it will have an effect on the inflation rate. However that is only one component of CPI and the prices of other components may have stayed the same. Therefore, it results in inaccuracy of results. I believe that eliminating the “price swing problem” is a great idea. What do you think about it?

  51. stakon 21 Apr 2013 at 11:44 am

    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?
    – The Bureau of Labor Statistics weigh different items according to the item’s proportion of the people’s expenditure. Generally spending on the housing gets greater weights than other goods or services
    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 figure can help determine how much adjustment is needed in the cost of living, social security benefits and taxes. The consumers will lose some of their purchasing power because there would be a fall in the real value of the money. It will also have an effect on saving because if the inflation rate is higher the interest that the people get, it would ve been better off spending that money rather than saving it. Thus it discourages saving and it will lead to less investment.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    – The CPI won’t be applicable to all households’ spending habits, meaning that people buy all different things and will be variations between them. Also, collecting a large amount of data cost a huge deal of money and time.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    – They are excluded because they are easily affected by the price swings and will not be relative to the inflation rate

  52. stakon 21 Apr 2013 at 11:50 am

    #hteoh

    You had lots of great answers in your comment, I found them very well organized and full of information. They were very detailed and i especially liked the explanation on your second answer about the why inflation rate is a great interest of the economy

  53. ghyafilon 21 Apr 2013 at 4:05 pm

    1. The BLS weights different items to see if there is a rise in every product or if just a few are affected, for example, by an increasing demand. It’s easier then to break down the CPI and see if there is inflation or not. Services such as rent weight more than most of our daily spendings.
    2. The CPI can be used as an indicator of the real value of the national money. This helps consumers to evaluate their purchasing power, and make them think if they should be saving money or can spend more. For the governments, it’s also an indicator on wether some preventions should be taken to avoid inflation or deflation which in some cases (export) could be negative for the country’s economy.
    3. The CPI is measured by the government by using primary data collected with questionaires or people doing investigations etc. This has a huge cost, also a lot of households have different spending habits that are not included if the investigation is made on a basis of a certain number of households.
    4. Oil and food prices do not have constant prices, they are affected by the “price swing problem”. This makes the calculations inacurate because they will give inflation results although there is no inflation.

  54. doan hai vanon 21 Apr 2013 at 5:49 pm

    Different items are included in CPI because people consume various types of goods and services. In order words, the money households spend on any item is included in their cost of living. Consumers’ spending pattern divides into 2 groups: 1 for their needs and 1 for their wants. Goods like houses, clothes, foods, energies seem to be consumed by any age, any gender from any level of income. Whilst, leisure goods like television, cars, smartphones and cosmetics seem to be restricted by certain groups of consumers. The second reason is there are always goods that are more expensive than other for example a car will cost 1000-time higher than a newspaper does.
    CPI is used to measure: the change in cost of living (change in price level of goods and services); to analyze consumers’ spending pattern (there are goods the consumers spend more on than others); to measures how much they spending on taxes, on social security. Especially, it is used to estimate inflation. We care about change in price level because it affects our cost of living. High price level means high cost of living. Thus our purchasing power reduces which makes us worse off. However, a little bit inflation may be healthy for an economy as it helps reduce unemployment rate.
    CPI is not a very reliable indicator of inflation because inflation means a change in price level of all goods and services while CPI does not always reflect this. If there is a significant increase in demand for a certain good, it will push up the CPI value. This is called the price swing. This doesn’t mean that there is a rising inflation. Price swing happens a lot to foods and energies therefore CPI will be more accurate to measure inflation without including the price of these items.

  55. doan hai vanon 21 Apr 2013 at 5:56 pm

    # hteoh
    I very appreciate your engagement to this topic. Your answer was in full detail with clear explanation. You have used lots of precise terminology to illustrate your point. I like the part that you commented on the redistribution effect resulting from inflation and how it impacts on different groups of people.

  56. ahmadson 21 Apr 2013 at 7:54 pm

    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 Bureau of Labor Statistics weight different items in order to get a full sense of how much the prices overall increase or decrease across the country. The items range from food to house rents and so on. The two goods that usually are outliers among the statistics are foods and gas prices.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    Knowing the CIP figures does not only help us make predictions about future price levels which would be nice to know because then consumers know how to make adjustments in their spendings. But CIP figures also tell us about how much the cost of living, the amount of money that goes into social security and tax will either raise or fall.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The traditional method includes all the main goods that people would normally be expected to consume in a society. However prices of certain foods may raise or fall rapidly due to some new health research findings which will lead to increase of consumption of that certain good and that will pull up the CPI in general. However that doesn’t mean that prices for all goods will increase so it is not an accurate measurement when we use the old method CPI

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    In order to give a better and more accurate account of the inflation in a country.
    And because food and oil prices are” subjected to large price swings”.

    Comment for #ghyafil: I agree with most of the points you have brought up and they are comprehendible. However the last point you made, “This makes the calculations inaccurate because they will give inflation results although there is no inflation.” I am confused a bit with this statement of yours. Because although food prices are increasing and decreasing all the times, but aren’t counted toward inflation measurement, but I think they still do affect the inflation because they are still goods that people will use. The same with most of economic theories that some have been proved wrong over time, this may be one of them that now we dont’ count food prices in CPI but I dont think this means that food prices don’t have affect on CPI, yes the increase in food prices levels does not mean the change in price of other goods, though.

  57. Tasa Grujicon 21 Apr 2013 at 8:17 pm

    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?
    The BLS weights different items according to their meaning and how much they are used. They evaluate how much of a person’s income goes to the payment of one of the items. The BLS does this to get a more accurate number of the CPI. It will measure rent as a heavier “item” then medical care or jewelry. This is because people will buy luxury rarely and go to the doctor’s once a month while the majority pays their rent regularly.
    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 tracks the deviation of the price of a certain product or products. It is used to determine how does the change of the prices of the goods and services over time influence the costs of living, social security and taxes. The CPI can be used to adjust salaries, pensions and taxes.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    With the influence of trends or discount, one short-coming of using the traditional method to measure the inflation rate using CPI is that it makes it seem worse than it really is. The change in price can only be the relative price change.
    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 the core CPI figure because oil and food is something that we can’t live and function without. We use them to an extreme amount (obviously) and when they are weighted, they have to be weighted more than any other “item” in the basket. Therefore, the CPI is unrealistic and to make it as accurate as possible, it is logical to exclude food and oil prices. Also, the prices of these products tend to vary making it difficult to be precise.

    @erwer: Nice response. I like how you used an example in your first question with the wages of worker being changed according to the CPI.

    @ Mirren Mecathum: I enjoyed reading your post. In question 3, it was very helpful mentioning the long run and the short run. Good job.

  58. lannison 21 Apr 2013 at 10:51 pm

    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?

    This is because the different categories included in the CPI take up a larger amount of a consumer’s income than others. Thus, it is only justifiable to to weigh certain items more than others. For example, the weight of house rent would be much more than the weight of clothing since a large portion of people’s income goes towards paying rent while a smaller amount is put towards clothing.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    Th CPI shows, in a sense, the healthiness of the economy. It shows whether or not the country is expanding faster than it can handle or if it is shrinking at an alarming level.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    Countries around the world include different items in their categories and so it is not effective in inflation comparison between countries.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    These items are subject to rapid, abundant and drastic price changes. If these items were to be in the “core CPI”, it could drastically skew the results.

  59. lannison 21 Apr 2013 at 11:03 pm

    # Monique T

    Very clear and concise answers. We had very similar thoughts when it came to the question. You had a great use of appropriate vocabular and used the vocabulary directly from the video.

  60. avonwendorffon 22 Apr 2013 at 5:37 am

    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?

    Good that are used most often or considered necessities get more weight in the calculation of the CPI. This is because consumer will purchase these products regardless of the rate of inflation, so it will affect their cost of living.

    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 at its core measures inflation rate. This is important because we must use this information to decide what needs to be changed in our economy, We cannot fix something until we know the problem. We care about price level changes because we want to keep the economy stable, so that people know how much they can buy with their wages for example. This allows them to be fairy certain that with the wages they are promised, they will be able to pay for next month’s grocery bills, morgage payment, etc

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The traditional method does not take into account that CPI may rise due to a single product, and not as a result of the entire “economic basket of goods and services.” The example the video gave was the price of tea rising which suddenly increases the CPI by 10%.

    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 its “core CPI” so that these often changing prices do not affect the entire CPI, as discussed above.

  61. avonwendorffon 22 Apr 2013 at 5:40 am

    Hi # lannis,
    I thought that you had a good point, stating that it is difficult to compare inflation between countries because they calculate CPI differently. I also think that this may be because some countries do not have the manpower or government agency set up to gather the information needed for the CPI calculation. In a large country, this would require traveling very far and gathering a lot of data.

  62. tleeon 22 Apr 2013 at 6:15 am

    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 Bureau of Labor Statistics weight different items because there are different necessities that the income of the people need to be used on. The type of good that weighs greater are the goods and services that a person’s income would go to. Basically they are the products that people need to pay for, like house bills.

    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 ultimately used to make decisions that will make our economy more stable. The CPI tells us basically the problems with our economy. So the government responds by changing and fixing the economy because we ultimately want economic growth or at least stability. Change in the price level is important because that tells us how much money we are basically making compared to the price of the goods and services.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The traditional method doesn’t acknowledge the fact that there can be an increase in the price of a single good or service. When we measure inflation rate, we want to know the average increase in the price level of ALL goods and services.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Oil and food prices were excluded because they change too much.

  63. tleeon 22 Apr 2013 at 6:17 am

    # avonwendorff
    First of all, great response to the questions. It seems like you were very knowledgeable about the topic. Also, I wanted to say that you made a great point in question 2. It is true that CPI figure is ultimately used to find our what we need to change or not to change about the economy.

  64. ABarrowon 22 Apr 2013 at 8:47 am

    The Bureau of Labor Statistics weights different items include in the measure of the price index because they consider (through research) some lifestyle factors to be more important to the average consumer, and thus ‘weigh’ more in the average consumer’s consumption habits concerning their income.

    Some types of goods that get greater weights than others include:
    Housing vs. Fizzy dranks
    Education vs. Alcohol and Tobacco
    Transport vs. Communication

    ————————————————————————————————————————–

    Purposes of the CPI include:

    Approximation of an average ‘basket’ of consumer goods by measuring the changes in the aggregate prices of these consumer goods that are ‘weight’ by importance…

    To make adjustments in the average costs of living, social security, taxes, economic growth, price levels, unemployment and/or fiscal/monetary policy.

    —————————————————————————————————————————

    Based on the video, a short-coming of the traditional method used for measuring the inflation rate using CPI is price swings (relative prices increasing/decreasing). Other problems include changes in the quality of the goods in the ‘basket’, special offers, changes in consumer tastes and the inevitable uncertainty errors that comes with sampling.

    —————————————————————————————————————————

    The BLS decided to exclude oil and food prices from its “core CPI” figure because those non-durable consumer goods make up volatile markets.

  65. ABarrowon 22 Apr 2013 at 8:55 am

    Ay Axu2,

    “Since CPI compares the values of good and service in one year to another year, it is basically measuring inflation and deflation.”

    Yeah, simply speaking, in the simplest terms, CPI is simply (the aggregate price changes / the number goods/services) but simply put, weight plays an important role in these calculations, directly or Implicitly.

    Tally-ho!,

    Amadou L. Barrow

  66. MeganKon 22 Apr 2013 at 10:17 am

    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?
    Because CPI is the measure of the changing prices in all goods and services on the market. The use of the measure is to be able to see and understand the price level of the entire market. Some goods are able to have more weight because they are bought more regularly, like rent and food. These items will have much higher weight than luxury or non-necessity items like jewelery or expensive clothes.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    Helps to show where changes in price level so that economists can view the movement of the Federal Reserve for the movement towards stable prices and full employment.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    If there are a couple larger weighted items that are decreasing in the amount of consumers, it will bring down the CPI drastically, even if the majority of spending is still at normal figures. With use of discount stores, the general population will aim to spend less because they wish to save more. This smaller amount of investment into the market will drag down the CPI figure for the nation.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Oil and food prices are extremely volatile and can be adjusted rapidly, and are easily influenced by consumers decisions, and it would make a massive impact on the consumer price index, so they’re not included in the core CPI for a nation.

  67. ylahhamon 22 Apr 2013 at 2:45 pm

    The BoLS weigh different items differently in the CPI in order to give a more relevant figure to represent changes in prices, as some things having a change in price is less important and releevant than another thing changing in price for example bread as compared to rolex watches. The type of goods that are weighted most heavily are those that are most essential and consumed the most

    the CPI figure is a way to show inflation, disinflation and deflation as it shows the changes in prices from year to year. We care about this because it tells us wether we need more or less wages, and it helps us to measure the health of the economy

    one short coming of the traditional method is that the CPI cannot be relevant to everyone, as many consumers buy different things. For example, the CPI for an elderly couple would have a whole different meaning than it would for a teenager, as the CPI is based on weighted price changes, and these are specific to certain products that not all groups will buy.

    4 this is because the average consumer does not purchase oil, and the food prices were wholesale and not retail prices that consumers pay

  68. ylahhamon 22 Apr 2013 at 2:49 pm

    a good answer, very thorough. The shortcoming of the CPI was quite clever i did not think of it that way, check my answer to see what i wrote!

    RE:
    # tleeon 22 Apr 2013 at 6:15 am
    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 Bureau of Labor Statistics weight different items because there are different necessities that the income of the people need to be used on. The type of good that weighs greater are the goods and services that a person’s income would go to. Basically they are the products that people need to pay for, like house bills.

    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 ultimately used to make decisions that will make our economy more stable. The CPI tells us basically the problems with our economy. So the government responds by changing and fixing the economy because we ultimately want economic growth or at least stability. Change in the price level is important because that tells us how much money we are basically making compared to the price of the goods and services.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The traditional method doesn’t acknowledge the fact that there can be an increase in the price of a single good or service. When we measure inflation rate, we want to know the average increase in the price level of ALL goods and services.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Oil and food prices were excluded because they change too much.

  69. kkozlovskison 22 Apr 2013 at 10:07 pm

    They weight diiferent items differently becasue we use some items more frequently than others, so we spend more money on them, so they are more important to us, so they need to have extra attention. The type of the goods that get the greatest weights compared to others are those items which we use on dially basis.
    The CPI as showned in the video is in a some way better way to measure inflation, even if it’s not accurate. The whole job of the government is based arounf CPI, because out of CPI they can somehow predict what’s going to happen in near future, so that they could bypass the shock part of the reccession. If the price level would rise then we would need to spend more money on these products, and as most of the times the wages don’t change alot, then when a higher price level sets in then you would be able to buy less, because you had less money to spend, and we want to spend more and more money, and that’s why we are so interested in changes in economy.
    When we use the traditional method then we cannot understand whether the price level is changed only for one good or the whole market, and it’s really important to know this, because as we see they are both the same, but if the price rises only for one product then we cannot say that it’s an inflation.
    They axcluded oil and food from the core, because the prices in these segments changed so many times in short period that it couldn’t be talked about inflation. In the most cases the change in prices in these two segments showed the activity of monopoly or oligopoly, and that they changed prices, and tested the theory.

    # ylahham
    I really liked your commentary for the most part, but about the weights. I thought that we need to spend money for everything we buy, so saying that the items which weight the most are the ones we need to pay for is a bit silly. I understand that you didn’t mean it in that way, but probably those are the items on which we spend rhe lagest part of our income.

  70. cameron7on 22 Apr 2013 at 11:52 pm

    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. Therefore, the weighting is different and takes consideration in the measure of the consumer price index.

    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. CPI is significant and is always considered in order to also recognize what sector has a bigger role in the economy.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One shortcoming is definitely Inaccuracies when collecting data; 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. Also the exchange rate can be a shortcoming since it is a factor that changes every day and therefore presents inaccuracies.

    Why did the BLS decide to 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 rapidly. Therefore they excluded those factors from the core CPI figure.

  71. cameron7on 22 Apr 2013 at 11:55 pm

    # kkozlovskis

    Very good answers I mostly agree with them. I agree with your first answer where certain factors are more significant in the economy than others therefore are weighted differently. Consumers spend a larger proportion on housing for example therefore has a higher CPI than other sectors.

  72. bobby con 23 Apr 2013 at 2:21 am

    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?

    Because different items tend to have a stronger effect than others. The example used in the video was jewelry and rent. A larger % change in rent would have a much greater effect than an equal percent change in jewelry, so the rent would be weighted stronger as it has a more important role to civilians. Goods that are necessary tend to be weighted greater.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    A few purposes for the CPI is to alter social security of determine how much taxes will be. The changes in price level in an economy is important to know because it will determine the inflation year over year.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The problem is that when items were measured, random spikes would be included that would greatly affect the overall CPI. If a good were to all of a sudden fall or rise significantly for no reason, the data would affect every other product.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS realized that when it came to oil and food, these were the most common to have these random price spikes, affecting every other product and the CPI as a whole. Excluding these products means that the CPI will be more accurate and not include these random price spikes.

    # MeganK

    Hi,

    You bring up great points. Looking at your third question, I think that weighing different items is a positive because some are definitely more important than others and should have a larger impact, but it is also true that a few of the “big players” falling or rising significantly would alter every other number and make the number almost insignificant as it is no longer accurate.

  73. rkangon 23 Apr 2013 at 4:46 am

    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?
    – Not all of our income is distributed evenly to a set of goods and services. There are items that we spend a large portion of our income on. In our day and age, people spend a substantial amount of their income to get gas to operate their automobiles. Other goods like jewlery isn’t as frequently bought as gas. People may still spend some portion of their income on jewlery but jewlery is really considered to be a luxury item. Gas can also be seen as a luxury item but to be frank, gas has now become more of a necessity. Each type of good or service has a different weight in measuring the CPI. The more important and frequently used the good or service, the large weight is has in the CPI. This also has to do with measuring the CPI to some degree of accuracy.

    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 serves as an indicator to determine the adjustments of the cost of living, taxes, and things like social security benefits. This is all useful information the government should have when making such decisions. The changes in the price level of an economy point out what direction the economy is moving towards. When the price level of an economy increases, this is a sure indication of inflation. When the price level of an economy decreases, this is a sure indication of deflation.

    3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    – It is very difficult to accurately come up with the inflation rate using the CPI. Since people have different incomes and different spending habits, the baskets of goods and services that economists use will not always be the same. The inflation rate that was calculated in the end may be somewhat erroneous. There are just way too many variables that economists have to consider in order to get an accurate picture of the inflation rate. There are just too many things that the traditional method for measuring inflation rate will not be able to cover.

    4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    – Food and oil are goods that are very volatile. Meaning, the prices of food and oil fluctuate very frequently. The fluctuation of one good of service isn’t what inflation is. Inflation is the increase in price of ALL goods and services. There are seasons and years when harvests are good and food costs are generally low. However, there are time when the weather prevents good harvests and food costs end up skyrocketing. Inflation or deflation has no part in the flucuations with food. This the same deal with oil. In the end, it all depends on the volatility of the good or service.

  74. rkangon 23 Apr 2013 at 4:54 am

    #bobby c
    Hi. I wouldn’t say that the fluctuations of such goods that are excluded from the core CPI are RANDOM price spikes. Goods like food really depend on the weather and the weather has a HUGE impact on the price of food. It really isn’t random. Also the price of oil fluctuates depending on the supply/demand of oil. The supply of oil really determines how much countries (especially many Middle Eastern counries) want to sell their oil for.
    But overall, really solid and concise answers.

  75. msurninon 23 Apr 2013 at 3:38 pm

    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 weights than others?
    Different items, goods and services are subject to relative price change to different extents, and therefore, people spend different amounts of money on different types of goods. Some goods such as food and energy are volatile – they are subject to large frequent price changes, and can greatly affect the CPI (Consumer Price Index). In order to protect CPI from large changes caused by volatile goods, they are excluded when calculating CPI. Moreover, consumers spend different amounts of money even on non-volatile goods, for example, rent and jewellery, as shown in the video. Depending on the percentage of total income of a consumer spent on each of those goods, the Bureau of Labour Statistics weight different items included in the measure of the CPI.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    While the CPI is one of the ways to measure inflation in an economy (the change in the price level), it also serves different purposes for consumers, investors, banks and the government. Banks use the CPI to determine whether or not they should change interest rates, government uses it in fiscal policies, etc.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    Some volatile goods such as food and energy, which experience large changes in their price level can affect the value of the whole CPI, either drastically increasing or decreasing it, while nothing else really changes. The core CPI helps to overcome this problem, as it excludes food and energy.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    As stated above, the BLS decided to exclude oil (energy) and food prices from its core CPI figure, as those items experience the most drastic price changes, and can significantly change the value of CPI, while nothing else really changes. Their exclusion allows to get a more precise CPI value.

  76. msurninon 23 Apr 2013 at 3:50 pm

    #rkang

    I liked your answer to the question #3 – even though BLS weights different items differently when calculating the CPI, it still can be fallacious, as everyone’s spending habits are different, and we are able to get only the average of those values. Do you by any chance know any other indices that allow to measure the change in the price level (inflation) that are a bit more accurate?

  77. clundon 23 Apr 2013 at 4:05 pm

    1. One doesn’t spend an equal amount of money on all goods and services bought, so a change in price of e.g. food will effects ones budget much more than a change in price of pencils and are therefore weighted more heavily in the CPI.
    2. The purpose of CPI is to find out if prices are stable, inflating or deflating to be able to predict “their next move”. This is important for us to know how to use our money. If we knew ex that inflation is in transit, it would be a good idea to buy that computer you’ve needed for awhile where as if prices where to deflate you would be well-advised to wait a bit longer before you buy the computer since your wages are not as likely to change at the same rate as prices and will therefore make the computer more or less expensive depending on which direction the prices are changing.
    3. One short-coming is if a relative price change occurs and makes a change in the whole CPI, and will resemble a inflation even though it isn’t, which is why the median CPI has been developed.
    4. The BLS decided to exclude oil and food prices from its core CPI figure because they are the two goods with the highest frequent relative price change occurring, so by excluding them it makes the CPI more reliable.

  78. clundon 23 Apr 2013 at 4:23 pm

    #Bobby C

    Hi, it seems like you’ve understood the video and the principles of CPI, but you might just want to explain yourself a bit more, so it becomes clearer, what you intended to say. E.g. you say that:” different items tend to have a stronger effect than others” here you might want to explain what you mean with effect like ex ” we use more of our money on certain goods and services than others, so if a relative price change occur for these products it will have a greater effect on our budget than if it had been for a product that we only use a small percentage of our money on.

  79. jyoungon 23 Apr 2013 at 4:27 pm

    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 items differently in the measure of CPI because people will spend different proportions of their income on different items. For example a higher percentage of income will be spent on housing which means that it will have a higher weighting.
    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 measures inflation (and deflation). This persistent increase in average price level can lead to negative consequences like a loss of purchasing power, a decrease in the competitiveness of resources, reduced investment from uncertainty etc.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The CPI ‘basket’ in representative of a typical household, but it does not apply to everyone. This means that depending on what you spend your income on, inflation could be smaller or higher than the given CPI.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Because food and energy prices change many times for unjustified reasons and seasonal variations. These fluctuations would have a big impact on CPI.

  80. clundon 23 Apr 2013 at 4:27 pm

    #Bobby C

    Hi, it seems like you’ve understood the video and the principles of CPI, but you might just want to explain yourself a bit more, so it becomes clearer what you intended to say. E.g. you say that: “different items tend to have a stronger effect than others” here you might want to in-depth your explanation of what kind of items you refere to like ex “we use more of our money on certain goods and services than others, so if a relative price change occur for these products it will have a greater effect on our budget than if it had been for a product that we only use a small percentage of our money on.”

  81. jyoungon 23 Apr 2013 at 4:28 pm

    # rkang
    Good answers, I like your point about CPI being useful for the government as well as central bank when making decisions and policy. I certainly would not want to be the one calculating CPI for a country, especially if food and oil were included.

  82. dtumanavarroon 23 Apr 2013 at 6:33 pm

    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 items differently depending on how important they are or how much consumers on average spend on them. An example of a good/service that has a heavy weight in CPI would be transportation.

    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 measures price changes and helps predict future inflation rates. Changes in the price level in an economy have a big affect on our finances and how we live. Will we have a low and steady inflation or will it increase at a rate deemed dangerous? Will we have a good deflation rate or a bad one? Price levels say a lot about the employment rate within the country.

    3. What is one short-coming of the traditional method used for measuring the inflation rateusing CPI?

    When using just the CPI it’s hard to differentiate between a relative price change, which is an increase in the cost of one thing we purchase and actual inflation. Also, people make use of discount price changes of volatile and come goods that the CPI doesn’t include, leading to a higher expected increase in inflation.

    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 its “core CPI’ figure because oil and food are volatile goods that can have extreme changes in price not related to inflation.

  83. dtumanavarroon 23 Apr 2013 at 6:38 pm

    #jyoung

    Hey man, I agreed with your answers and I liked how you responded differently to question 3 than most of us did. I liked how instead of using the tea example used in the video, you brought up the “CPI basket” and how everyone spends their income on different things in different balances.

    Thanks!

  84. Malen Kon 23 Apr 2013 at 6:38 pm

    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?
    The Bureau of Labor Statistics weighs different items included in the measure of the consumer price index because different person’s income might goes towards a different purchase. It is necessary to identify which goods or services are more important in comparison with others, as they take up a larger share of the consumers’ income so as to accurately show the effect of inflation on a particular good for an average consumer. The types of good that gets a greater weight than others are goods that consumer pay most for, like food, electricity, rent, etc. The weight will be greater for goods or services that are more important.

    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 tracks how much the price of cost of living, social security, taxes changes each month. The CPI figures are often used to make cost of living adjustments, adjustments to how much people are going to be paid in social security benefits and the amount of taxes that people pay and other things. However, it is not a good measure of inflation month to month. Inflation is a general rise in the prices of the general things we buy. We care about the changes in the price level in an economy because these changes will affect the CPI as CPI measures the change in the average price levels. Therefore, these changes also affect how much money is worth.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    As mentioned in the video, for example, people start drinking more tea instead of coffee and all of a sudden people starts to buy more tea. Therefore, the price of tea is going to sky rocket, it may jump so much even though it carries a relative low weight in the consumer price index, that it drives up the CPI by like 10%. This is not inflation but it is the spike in the cost of one thing we buy, which is called relative price change. People shifted consumption from one good to another and the price of that second good went up, all prices did not rise. That is the problem with CPI to measure inflation especially in over a short period of time. CPI might be pushed up by price swings and price swings are not really inflation therefore it is not an accurate measure of inflation.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    The BLS decide to exclude oil and food prices from its “core CPI” figure because they are subject to large price swings, which means that oil and food prices are always going to be affected by this large price swings and price swings aren’t really inflation therefore, inflation measurements are inaccurate since those prices have nothing to do with inflation.

  85. Malen Kon 23 Apr 2013 at 6:39 pm

    #alee

    Direct and short response! You’ve managed to cover all the necessary points in the questions so well done! Perhaps, you can give me some examples of the type of goods that weigh more than others?

  86. Sasha_Son 23 Apr 2013 at 6:42 pm

    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 items end up being weighed differently to one another because their significance varies from consumer to consumer, meaning that certain goods appear to have more precedence than others, and hence take different amounts from the income of the consumers. The categories exist to represent this idea of significance of a product between different consumers, with the weight representing their importance to their income. Energy prices and food in particular have much weight, as they take a large share of the income of many consumers. With a large section of a consumer’s income spent on these two in particular, the CPI will increase or decrease with the prices of energy and/or food. Food and energy are very important to consumers because they can be considered price-inelastic, as they are necessities, so to speak. People need food to live, and people need energy to live in the modern world (in a manner of speaking), through transportation, their household, etc. The propensity of high inflation rates (if included) and price volatility for these two categories essentially excludes them from consideration from the Bureau, as most other categories do not fluctuate as greatly. Considering volatile categories amongst things that remain relatively consistent tends to make the CPI much less reliable, making other categories much easier to include without having relative price changes.

    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 price level in an economy essentially dictates the required adjustments for social security benefits, taxes, and the cost of living. With inflation, consumers tend to have less ‘purchasing power’, meaning that they end up having to buy less for ‘more’ of their income. This is a result of devaluation of their currency, a byproduct of high inflation. Inflation itself is measured by price changes, but the price change of one product is no real implication of inflation, as it really is only one product that makes the price level change, so to speak. Price level is an important concept to consumers because it dictates the way in which people live their lives. Price levels determine the average price of products that perhaps people rely on every day, or people deem a necessity in their live for whatever purpose. It partially dictates the allocation of people’s incomes. Increases in price level will result in devaluation of the currency, which, again, results in less purchasing power, causing habitual changes of consumers. Loaning may also become a problem, i.e. if someone were to lend money prior to a price level decrease, the person who borrows would benefit as the value would increase for them, but the lender would lose money as the value of the money that they just lent increases. This may contribute to imports and exports, as certain imports, due to some inflationary happening, may be more expensive than they were as a result of more value in their currency, making it more expensive than it typically would be, forcing a change in importer.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    Inflation rates are made inaccurate by CPI through the idea of generalizing the populace. CPI only takes into account the items found in a typical household within a given nation, generalizing and averaging out everybody’s habits into one amalgamated figure. There is no consideration for things like age and gender, which themselves dictate what is found in people’s ‘basket’. A girl may end up wanting to purchase a higher quantity of cosmetic products in comparison to that of a male, or a young boy may be more fixated on buying toys than an old man who is at retirement age. The samples are so limited that there is far too much that is not taken into account, meaning that much of the CPI’s data is already too ‘small’ a sample to be considered an accurate average.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The exclusion of both oil and food prices is credited to the idea of food and energy being highly volatile categories of the CPI, meaning that they are subject to large price increases and decreases that may very well have nothing to do with inflation, which causes the inflation rate itself to fluctuate and appear more erratic and inaccurate.

    Malen: Quite the concise response, I see. On your response to the last question, would there be any other part of the ‘core CPI’ that would be considered worth removing based on volatility? What do you think makes oil and foods such volatile categories as it pertains to CPI?

  87. nwarneron 23 Apr 2013 at 6:42 pm

    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?
    They weigh the items based on how much people will spend on them so the items that people spend the most on will impact the CPI the greatest amount. This way because people spend more on food rather than luxury items it will have a higher weighting.
    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 measures inflation or deflation and how it impacts the average consumer. The increase in average price level measured by CPI has negative effects on consumers as purchasing power decreases this can cause slower economic growth. This can shake confidence in the economy causing all sorts of problems such as reduced investment among many others.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The CPI is a measure of the average CPI in a typical household. Therefore, it does not apply to all households. This means that due to differing circumstances the actual inflation could be different based on income, debt and amount of fixed items.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    This is due to the fact that these items have huge shifts with vague reasons that would have a great impact on CPI

  88. nwarneron 23 Apr 2013 at 6:43 pm

    #clund
    I like your answers. I especially like your answer to question 4. It is very descriptive and describes your reasons well using economic terminology. Your use of economic terminology makes the answers useful for relating concepts to economic ideas.

  89. m2keoon 23 Apr 2013 at 7:10 pm

    My Response:

    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?

    The Bureau of Labor Statistics weights different items included in the measure of the consumer price index because not everyone spend the same amount of money on the same thing as each and everyone of us has our own wants and needs. Therefore, in order to increase the accuracy of measuring inflation rate, it is very important to differentiate the goods and services that are most consumed from the rest of the goods and services. These goods and services are then grouped into different categories with given weights along with index prices to reflect its importance in the average consumer’s income. As mentioned in the video, energy and food prices are the two categories that are weighted heavily as they are also very heavily consumed, which also means that they take up a huge proportion of consumer’s income. Since energy and food prices are subject to large price swings, Bureau has decided to exclude this, as price swings are not really inflation and if they are included then we are really not measuring inflation very well.

    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 figures indicate the average price changes each month. These figures can be used to help adjust cost of living, as an economic indicator, a deflator of economic series, and to adjust dollar values, etc. The accuracy of inflation relies on the data collected and since it is very impossible for us to look at all goods and services, it is fair to say that the measurement of inflation will not be fully accurate. We care about changes in price level in an economy because we are obviously affected by it in one way or another. As a consumer, my spending habits will obviously change as inflation would only means an increase in prices of goods and services. Other stakeholders such as producers, suppliers, investors, government, etc. are all affected by it as well but just differently.

    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 essentially the inaccuracy of the data. The basket used in any country represents the purchasing habits of a ‘typical’ household, but this is not applicable for all people as people have different spending habits. Thus, leading to inaccuracy and unreliability of the data used.

    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 its “core CPI” figure because they produce price swings when consumers changes their consumption of one particular good to another and this is not inflation. It is just a relative price change that does not help in measuring inflation as there is no relation to inflation or whatsoever.

    Comment:
    # alifsigridardottir
    Great response! CPI figures do help to adjust cost of living, how much tax to pay, etc. but what do you think is its main purpose? You’ve also included many valid examples, which is great since it does help to further support your point. Seems like CPI does have a handful of limitations compared to BLS so I’m actually really curious as in why many countries choose to use CPI instead despite its pullbacks. What do you think?

  90. alessiaayoubon 23 Apr 2013 at 7:24 pm

    RESPONSE TO QUESTIONS- Alessia Ayoub
    1) The BLS weights different weights according to the proportion of income spent on that good or service. Which means that the higher the % 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 third world countries where they struggle to pay for food/water and hence water/food would have a greater weight.
    2) 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 means that they will buy a smaller amount of goods with the same amount of money (vs. previous to the inflation). If the price level goes up due to demand-pull inflation then the government could possibly need to raise direct taxes to decrease aggregate demand and this would mean that people have less disposable income.
    3) One short-coming is that one item that has had a EXTREME change in price (in this video tea was mentioned) would give the wrong picture of the inflation rate as the all other items prices might have stayed sort of constant.
    4) The BLS decided to do this because food and oil prices are highly volatile meaning they vary a lot in a short timespan and this would give misleading/inaccurate figures of the rate of inflation.

    Comment:
    # m2keo
    Amazing response! Thats true the basket is just about the typical household, I didn’t think of it in that way before. For example in India with the social classes, I wonder how they generalize…

  91. amcpikeon 23 Apr 2013 at 7:41 pm

    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?

    Your average consumer will spend a different percentage of their total earnings on different goods. For example they may spend a quarter of our salary on food, and merely a few percent of it on pet food. With this in mind, the Bureau of Labor Statistics allots a different weighting to each product that consumers buy in order to accurately reflect inflation rates. The goods that we spend a larger percent of our income on, will have a greater weighting in the CPI calculations. This means that fluctuations in the prices of goods such as electricity, oil, food, etc. will have large affects on inflation rates, which in turn affect the the cost for everyday products, the price of loans, return from investments, taxes, and infrastructure growth.

    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 serves as a good measure of how strong or healthy an economy is. Although at the same time knowing what the inflation rate of the economy is can serve a number of practical benefits as well, including but not limited to: determining taxes, pensions, interest rates and wages. The CPI can also help the government develop fiscal and monetary policy specifically designed to combat any issues that the countries economy may be facing.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One of the most common issues with the traditional method of measuring inflation using CPI is that it can be influenced by the relative price change of a single commodity. In the example that we were given in the “The Drawing Board” video linked above the CPI of a country rose ten percent following an increase in the demand for tea. What this means is that changes in the price of a single commodity —even with only a small percentage allotted to it in CPI calculations— can influence inflation rates across the country.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS, being aware of the aforementioned flaw in CPI calculations, would have excluded oil and food prices because of their high price volatility and impact on the final statistic. Because a large majority of our incomes is typically spent on food and oil related products they would have both received a large weighting in CPI calculations. This large weighting coupled with the price volatility that arises due to fluctuating weather patterns, diseases, civil wars, etc. would —in the minds of the BLS— have only served to make the statistic less reliable.

  92. amcpikeon 23 Apr 2013 at 7:44 pm

    #lannis

    I would have to agree with you completely that it is difficult to compare inflation rates between companies. Would you suggest the creation of an international organization with the sole purpose of comparing statistics like these?

  93. skangon 23 Apr 2013 at 10:29 pm

    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?
    -Certain items have more weight because we spend a different proportion of our income on different things. These goods are more important and thus have more weight than other items. Goods that we spend a larger proportion of our income on get a large consumer price index.

    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 can measure how healthy or unhealthy the economy is. The government uses the CPI in order to determine how to set new fiscal or monetary policy in order to help make the economy healthier or less “unhealthy.”

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    -The biggest problem is that the CPI can be adjusted based off of changes in different items. It can fluctuate very easily and is thus slightly unreliable.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    -These figures adjust too easily and thus the BLS decided to excluded oil and food prices from their core CPI figure. Also, most of our income is spent on food and oil, thus their CPI weighting would be very high. As a result of the volatility of these prices, the CPI would shift far too much.

  94. skangon 23 Apr 2013 at 10:31 pm

    # amcpike
    I agree, the CPI can help the government determine monetary and fiscal policy and is very useful to the government in helping determine whether or not their economy is sickly or healthy. However, due to the volatility of the CPI,is it really that reliable?

  95. rparsonon 24 Apr 2013 at 2:18 am

    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?

    The BLS weights different items in the CPI because these items make up more of consumer spending, and are more important is tracking overall effects of price changes.

    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 can be useful to track inflation, because shifts in the price level in an economy can be used as a diagnostic tool to decide how the government should best act, eg. How much seniors need in social security in order to cover their typical cost of living.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The traditional method can include individual products which experience massive price shifts on their own, which while not important for the overall shift in prices, an affect the average value and skew results.

    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 form the core CPI figure because these are typically the goods which are the most volatile in their prices, and are therefore less useful for examining the overall trends in prices.

  96. rparsonon 24 Apr 2013 at 2:21 am

    @nwarner,
    I like your answer 3 distinction between the average household and the real needs of households. I imagine, for instance, that most people do not need to feed 2.5 children!

  97. Csabaon 24 Apr 2013 at 8:45 am

    1) The BLS is based on the amount of money spend on the product and since we do not spend the same amount of money on every product the BLS relies on an average. This average is based on the fact that people spend more money on nutriment rather than luxury goods in leads to an higher weight

    2) The CPI figures give us the information about the price change in the economy. This price change affects most of the

  98. Csabaon 24 Apr 2013 at 8:59 am

    i accidentally pressed the Submit button

    2) the CPI figures give us the information about the price change in the economy. This price change affects most of the people depending on their position in the economy.

    3)In this method the change in CPI is taken into account since it can rise/fall, because in the traditional method it is focused on individual items rather than the hole basked of goods.

    4)Food and oil is excluded from the core CPI because these items are highly volatile and most of our income is spend on it. It is not taken into account because it would lead to and inaccurate value.

  99. sminarovicon 25 Apr 2013 at 5:44 pm

    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 Bureau of Labor Statistics weights different items based on which items are typically bought the most. Either from the total units bought of a good or the total money spent on the good. These items that are most important to a household are grouped into a “basket” on which the CPI is based.

    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 can show if there is inflation or deflation in a country’s economy and by how much prices are increasing or decreasing. This is very important for governments to know so that they can then make changes to stabilize the inflation or deflation.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    If the price of one product drastically increases or decreases, the CPI will also increase and so the inflation rate will seem to increase even though the prices of other products may stay the same as before.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Because food and oil prices are very susceptible to price swings which does not actually show inflation.

    #nwarner
    Do you think then that the CPI may change consumer confidence which will then cause a shift in aggregate demand?

  100. Sebastian Changon 25 Apr 2013 at 6:27 pm

    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?

    The Bureau of Labor Statistics weight different items included in the measure of the Consumer Price Index (CPI) because consumers spend their income a different portion of their income on different types of items. In order to determine an accurate value for the inflation, it is necessary to place weights on different types of goods according to their importance in the average consumer’s income. The greater the weight on a particular type of good, the higher the portion of average consumer’s income is spent on that type of good (i.e. the greater the importance in the average consumer’s income). In a Consumer Price Index (CPI), transportation, housing, and household type of goods would tend to have a greater weight than others as a high proportion of the average consumer income is spend on those types of goods.

    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 Consumer Price Index (CPI) is used to represent the average price changes for goods and services that consumers tend to purchase (although the method and calculations used actually only represent a “basket” of goods). It can be used to help the consumers to make adjustments to their cost of living (if necessary), and may help the government to decide on the appropriate taxes changes. We care about changes in the price level in an economy because it directly affects us (the consumers). For example, if there is an inflation of goods and services (i.e the price levels for goods and services in an economy increases) in an economy, this would mean that the real purchasing power (real value of one’s money) will decrease as it would be relatively more expensive to maintain our current standard of living.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One shortcoming of the traditional method used for measuring the inflation rate using CPI would be the inaccuracies in the CPI representations and data. Specifically, the fact that the CPI only represents the change in average price for a selected “basket” of goods and services that are mainly consumed by the typical household, and it does not represent every household.

    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 “core CPI” figure because they believe that oil and food prices create a “price swing problem” which makes it very inaccurate to include said products in the measurements of the CPI. In other words, the BLS believes that the prices of oil and food are too volatile and too unpredictable to be included since it would then cause inaccuracies in their CPI figures.

    Comment on #hteoh’s response

    Great Response! I definitely agree that excluding oil and food prices would diminish the inaccuracies in the CPI figures. Personally, I believe that other goods and services such as gold may also cause a “price swing problem” since the price of gold frequently fluctuates according to the economic condition. What other goods and services do you think should be excluded from the “core CPI” figures?

  101. xhuanfon 25 Apr 2013 at 11:36 pm

    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?
    Because there are goods and services that are more important than other goods in people’s life. For example, the change of house price will be more important than the change of jewelry price, since house is more necessary. People spend more money on some goods than others, so the different goods should be weighted differently. Some important goods and services are rent, food, clothes and gas.
    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The major purpose of CPI is to measure inflation rate and avoid inflation. Government can make policies according to CPI, for example, adjust the cost of living, social security and taxes. We care about the changes of the price level because it influence our standard of living, and it also decide how much we should get for wage and how much we should pay for tax.
    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The price of one particular good might rise due to some non-inflation reason, for example a shift of consumption habit. The sudden rise of price of one good can drive up CPI pretty high, but that doesn’t represent a rise in average price. The price of other goods actually didn’t change.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Food and oil prices tend to have big relative price swings that are not caused by inflation, The food and oil prices might change rapidly while the price of other goods didn’t actually change. If these price changes are measured in CPI then the inflation rate would be accurate.

    # sminarovic

    I really like your answer and I think the CPI is important to the government since they can make policies based on this. They could adjust the cost of living, taxes and social security.

  102. jduplessison 26 Apr 2013 at 10:47 am

    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 items are weighted according to how much money the average person spends on the good. For example a persons rent should be higher than the money spent on jewelry .
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price in an economy?
    The CPI figure is important as it is used to calculate the cost of living. The amount of money people get from social security and how much tax one needs to pay.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    CPI does not account for changes in the demand of a specific good. The price for one good might spike but this is not inflation. It’s called relative price change.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    They decided to exclude food and oil prices because these goods are the most likely to have price swings.

    # xhuanf
    Why do you think food and oil prices would change so rapidly?

    # Csaba
    I agree, the rise and fall of prices over a short term makes the results inaccurate.

  103. edubison 26 Apr 2013 at 4:01 pm

    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?
    The BLS weights different items in the CPI differently based on the amount of a households income spent on the specific items. The goods that get a greater weight typically include rent and food and drinks.
    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 serves as a sign to let us know that inflation is occurring. Changes in the price level of an economy affect all people and determine cost of living.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    Over a short period of time especially, a relative price change may be confused for inflation. CPI can change because of price swings and CPI is more reliable when statistics are looked over a number of years.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Food and oil prices are subject to large relative price swings, and so were excluded from the BLS’s “core CPI” figure.

  104. edubison 26 Apr 2013 at 4:05 pm

    #xhuanf
    It is true that there are some goods more important than other goods in a persons life, but the BLS weights different items included by the consumer price index because a different proportion of the households income is spent on the different items.

  105. ykim3on 26 Apr 2013 at 10:03 pm

    1. BLS weights differently according to the income spent on the products. It shows thats that the higher income spending on a production the weight becomes grear. Therefore, spending can be very important factor on measuring the BLS.
    2. The CPI figure is a some kind of a sign to show that inflation is happening. Increase or decrease in the price level of an economy affects all people and their living standards.
    3. If prices rapidly increases or decreases, the number of CPI will also increase and also the inflation will increase.
    4. It is because they can have price swings. They can be changed rapidly more than any other goods.

    #edubis
    I like your answers. I was confused with number 2 but your answer helped me out. Good job.

  106. hkimon 26 Apr 2013 at 11:01 pm

    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?
    The Bureau of Labor Statistics weight different items included in the measure of the consumer price index because that shows how much of people’s incomes goes to a certain good or service. Most likely things like Housing/Rents will get more weight than entertainment and clothing.
    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 allows the government to make changes in the costs of living, make adjustments to the social security benefits and alter the amount of tax to pay. Most importantly it allows governments to observe patterns in inflations over the months to predict the overall prices of goods and services. We care about the changes in the price level in an economy because that may have a really big impact on our lives. For example, if a worker lives in a city 1 hour away by car from his company and suddenly one day the price of oil nearly triples, he is going to have a really hard time. It is highly unlikely that he will quit going to his job so that will mean he will have to pay for the oil and that is going to impact his spendings. Like this example, these inflation patterns will have impact on our everyday lives.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    CPI has one main limit which is that the spending habits are not able to be measured. Spending habits may differ each month so we cannot assume that they are the same all throughout the year. Also it takes lots of time and effort to collect this large amount of data.
    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 its “core CPI” figure because they are easily affected by price swings so they are too much fluctuations.

  107. hkimon 26 Apr 2013 at 11:06 pm

    #stak

    Hey! Great job with your answers! I have to say that they were really high quality answers. The word choice was not too difficult (which is good because it is easier to understand) but it explained everything that you needed to. Oh and I also liked how you mentioned that CPI requires lots of effort, money, and time. Good job! :)

  108. jaimejaime8on 30 Apr 2013 at 1:13 pm

    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?

    The Bureau of Labor Statistics weights different items included in the measure of the consumer price index based on the different amount of income spent on the such items, the higher the income spent, the greater the weight. Rent, food and drinks are examples of products that get a greater 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 figure serves us to spot when inflation is occurring. Changes in the price level of an economy determine the costs of living for that economy’s area.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    In short time periods, a change in price may confuse some people to believe inflation is taking place. CPI is way more reliable when statistics are studied for longer periods of time.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    This was due to the fact that these two goods are “victims” of large and quick price changes and thus were excluded.

  109. bdesslegnon 15 May 2013 at 9:54 pm

    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?
    The Bureau needs to weight different items included in the measure of the consumer price index, to help it represent their importance in the average consumer’s income. Goods that take up more of a person’s income will get greater weight that goods that do not.
    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 three things mentioned in the video were
    – Cost of living—through the CPI we might be able to deduce the rise in price levels, i.e. loss of purchasing power , therefore jobs may increase wage rates and such.
    – Social security—the government will keep in mind the purchasing power of the money it used to give, therefore again increasing social security as inflation hits.
    – Taxes – taxes may be reduced in response to inflation as well
    In general, the CPI helps in making future adjustments to better face a future with inflation.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    There may be change in consumption habits, as in the case of the video with the tea that was of high demand. So, the simple shift to a substitute might cause the rise in price as the demand increases for that item. Therefore, the CPI will not just reflect inflation.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    That is because they are volatile in their price changes and it may not necessarily be because of inflation.

  110. bdesslegnon 15 May 2013 at 10:01 pm

    # jaimejaime8
    Good responses. But more detail on your answer to the second question would have made it better, you could mention, things mentioned in the video such as its use for adjustments of taxes and social security payments.

  111. mchastanet2on 21 May 2013 at 6:54 pm

    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?

    Because some goods are used much more than others and therefor take up a larger amount of people income. They have a bigger weight in the calculation of the CIP. For example the weight of a house rent is much higher than the weight of the clothing as people tend to spend more for they’re rent than for the clothes.

    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 is a measure for the inflation rate. It gives us the changes in price in an economy, so the problems the inflation is causing. We care about the price level because with it you can plan and anticipate for the future. Knowing the price level allows people to know what they can able to buy with the wages they have. It helps companies to know the demand for their goods.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The traditional method doesn’t acknowledge the fact that there can be an increase in the price of a single good or service. The example given was that the price of tea rising caused increases the CIP to increase by 10%.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Because the prices for these goods change a lot and very rapidly. This affects a lot consumer decision. This would cause a massive impact on the consumer price index making the results not that reliable and true.

  112. mchastanet2on 21 May 2013 at 7:01 pm

    # bdesslegn

    Hey ! I think you gave perfect answers to the questions. They are short and precise.
    I aggree with you that what could cause food and oil price to change could be due to other substitutes and not due to inflation.

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