Download Inflation and CPI

Inflation
Agec 217, Summer 2007
Inflation
• Top Box Office Movies of All Time:
http://movies.yahoo.com/mv/boxoffice/alltime/
• Gone with the Wind (1939): ranked 77th
– Tickets in 1939
– Tickets in 2007
$0.23
$6.58
Inflation
• Inflation: An increase in the overall level of
prices in the economy
• Inflation Rate: The percentage change in
prices from the preceding period
Historical Inflation
Inflation
• Your rent under 20% inflation during four
years at Purdue
– Year 1: $ 500 / month
– Year 2: $ 600 / month
– Year 3: $ 720 / month
– Year 4: $ 864 / month
– Year 5: $1,037 / month
• Rent doubles in 4 years (year 5 – year 1)
Inflation
• What if prices increase dramatically and
wages do not keep up
• Hyperinflation: out of control inflation, often
above the 20% - 30% range
Inflation
• Mexican Peso
– 1993: Nuevo Peso = 1,000 Pesos
– 1996: Dropped the “Nuevo Term”
• Essentially devalued the Peso multiple of
1,000
Inflation
• Hungary after WWII
– July, 1946 (Pengo)
• Inflation Rate
41,900,000,000,000,000%
• Prices doubled every
15 hours
• Forint: August, 1946
– 400 octillion Pengo
Inflation
• Top Box Office Movies of All Time
– (adjusted for inflation):
http://www.boxofficemojo.com/alltime/adjusted.htm
• Gone with the Wind (1939): now ranked 1st
– Tickets in 1939
– Tickets in 2007
$0.23
$6.58
Inflation
• Issues with GDP Deflator for Inflation
– Measure what is produced domestically, not what
consumers actually buy
• Imports consumed but not produced here
• Government and Investment produced here but not
consumed
– Current products disappear and new products
appear
Consumer Price Index
• Measures a “basket” of goods as purchased by
the typical consumer
– Only addresses the first problem of GDP deflator
– Still issue with changing baskets over time
CPI Data Collection
• Bureau of Labor Statistics - http://www.bls.gov/cpi
-Current CPI: 2001 and 2002
-10,000 families interviewed each quarter
- 7,500 families tracked habits for two weeks
-Only looks at average urban consumers (87% of
population)
CPI Components
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FOOD AND BEVERAGES
HOUSING
APPAREL
TRANSPORTATION
MEDICAL CARE
RECREATION
EDUCATION AND COMMUNICATION
OTHER GOODS AND SERVICES
GOVERNMENT FEES FOR SERVICES
TAXES PAID WITH PURCHASE OF OTHER GOODS
CPI Measured
• After surveying consumers, the Bureau of
Labor Statistics determines the following diets
and prices:
– 2005: 500 pizza slices and 300 sodas
• Prices: pizza = $1.00 and soda = $0.50
– 2006: 550 pizza slices and 330 sodas
• Prices: pizza = $1.10 and soda = $1.00
CPI Measured
• The Bureau of Labor Statistics determines a
typical consumer basket based on survey data:
– Let’s say the consumer basket is
• 525 pizza slices and 315 sodas
CPI Measured
• Price of the consumer’s basket
– 2005
• 525 * $1.00 + 315 * $0.50 = $682.50
– 2006
• 525 * $1.10 + 315 * $1.00 = $895.50
– Percent change = 31.2% inflation
CPI Measured
• Consumer Price Index (base year = 2005)
– Calculation
• (Basket Price / Basket Price for base year) * 100
– 2005
• ($682.5 / 682.5) * 100 = 100
– 2006
• ($895.5/ 682.5) * 100 = 131
Using CPI
• Calculate Inflation from CPI (all CPI’s must be
based on the same base year)
– Calculation
• ((CPI current year/CPI previous year) – 1) * 100
– 2006
• ((131 / 100) – 1) * 100 = 31% inflation
CPI Issues
• What if the basket changes?
• Computers and comparable products over time
• VCR’s and price inflation
Historical CPI and GDP deflator
Summary
• CPI is different than the GDP deflator in that is
measures what consumers actually use, as
opposed to what is produced domestically.
While there are some drawbacks, it is the
most widely used measure of inflation.