measures of inflation
what is inflation rate based on?
the CPI measure computed every year; changes from year to year
consumer price index (CPI)
uses a fixed weighted market basket of goods and services that the average consumer purchases regularly
weighted
worth more than other items
list of leading indicators
average hourly work week, building permits, stock market, inventories
substitution bias weakness of CPI
does not take into account the fact that consumers work their way around costly items; interprets an increase in a good as inflation and does not consider the fact that consumers will buy its substitute instead ex: chicken prices increase, turkey sales increase
what does a GDP deflator of 150 mean?
50% inflation occurred since the base year
most popular measure of inflation
CPI
weakness of GDP Deflator
calculated by using GDP; does not include imported goods
three measures of inflation
consumer price index (CPI), GDP deflator, and producer price index (PPI)
building permits
early warning of economy if building increases or decreases
what happens to inflation measures as PPI increases? Why?
foreshadows increase in other measures of inflation; raw materials/input prices increase and product prices will consequently increase as well
leading indicator
group of data that tells where the economy will be in 6-9 months
what is currently the most weighted item in CPI?
housing
weakness of CPI- quality changes
if price increases in a good because the quality has increased, it looks inflationary on the CPI
GDP Deflator of 100
means that 0% inflation occurred during the year in question
Producer Price Index (PPI)
measures the price change of goods commonly purchased by businesses (raw materials)
weakness that CPI uses only retail prices
no sales; does not consider the sale prices of items
GDP Deflator
nominal GDP/Real GDP x 100 = 100; measures goods and services actually produced
average hourly work week
precursor to cyclical unemployment
inventories
stack up, people are not buying products as fast
stock market
stock market increases, businesses make money
weaknesses of CPI
substitution bias, uses only retail prices, quality changes, introduction of new products
weakness of CPI- introduction of new products
takes a longer time for the CPI to recognize; not originally in the CPI
