What is the Consumer Price Index? The Consumer Price Index is simply a basket of goods that is used by the Bureau of Labor Statistics to gauge how much price inflation the economy is experiencing. It is "weighted" based on how much of each good the average family uses. Therefore if 41% of your expenses are related to the housing category and 3.6% of your expenses are related to the apparel category and Apparel goes down by 1% and housing goes up by 1% your overall expenses will still be going up. In other words, if you spend $820 on rent a month and $72 on clothes a 1% increase in your rent would add $8.20 to your monthly rent expenses while a -1% would only save you $0.72 on … [Read more...]
How Inflation Can Reduce Your Annuity Income (and what you can do about it)
Even though this is written from a UK perspective, it holds true for the rest of the world, too. ~ editor Annuity Income and Inflation Inflation as defined by Wikipedia is "an average index used to measure the rise in the general level of prices of goods and services in an economy over a period of time" which in layman's terms means the average amount by which goods and services are increasing. Monetarism an as economic theory identifies keeping inflation low as the main goal in achieving sustained economic growth, as opposed to reducing unemployment. The reason for this is that whilst unemployment is a burden on the people without jobs, high inflation (it is argued) impacts the entire … [Read more...]
The Real Basket of Goods
I recently received the following from Ed Devol, "When I try to educate people about the impact of inflation, I find putting it in terms of time worked for something is a good way of explaining inflation". Thanks, Ed. I agree, when I am deciding whether to purchase something, I like to think of it in terms of how many hours I have to work to buy it. (It helps keep it "real"). In addition economists often link how many hours the average person has to work to eat. A poor country might require eight hours of work a day just to eat. While a rich country might require only 1 hour a day. So you might like the following article by Lynn Carpenter as she tracks prices and earnings over the last 60 … [Read more...]
Does the Consumer Price Index (CPI) Include Taxes?
Question: I have heard over the years that the CPI does not include taxes as one of its components. In other words, an increase or decrease in a tax rate is not considered a change in consumer prices/costs. Is this true? If so, how is this omission justified? Thank you, James Schmidt … [Read more...]
Inflation vs Consumer Price Index – Do you know the difference?
Many people are confused by the difference between Inflation and the Consumer Price Index. The Consumer Price Index is as its name implies an index, or “a number used to measure change”. The Consumer Price Index (CPI-U) The government chose an arbitrary date to be the base year and set that equal to 100. Currently that date is 1984. (Or more accurately the average of the years 1982-1984) previously the base year was 1967 (they change the base year every once in a while so you don't notice that there has been over 2000% inflation since the start). See Cumulative Inflation Since 1913. Every month the Bureau of Labor Statistics (BLS) surveys prices around the country for a basket of … [Read more...]
Bureau of Labor Statistics Changes CPI
The Bureau of Labor Statistics (BLS) made changes of historical proportions this month by changing how the Consumer Price Index is reported. For the first time in history the BLS has begun reporting the Consumer Price Index to three decimal points. Their official statement is as follows: "Effective with this release, index levels are now published to three decimal places. Percent changes based on these three-decimal place indexes will continue to be published to one decimal place. " So for January 2007 the CPI-U index is now 202.416 rather than 202.4 but their official inflation rate is still 2.1% rather than the 2.08% that we calculate it out to. While I applaud the higher level … [Read more...]