Question

The Consumer Price Index (CPI) is the most popular indicator of inflation.  Consider the price and consumption data given below.

Product	Quantity Purchased 2000	Price per Unit
		2000	2003	2004
Oranges (kg)	5	$ 2.00	$ 2.50	$ 2.60
Flour (lbs)	10	1.30	1.80	2.00
CD’s	2	18.00	20.00	23.00
Draft Beer	3	1.00	1.70	1.80

(a)     Using 2000 as the base year compute the value of the CPI for the years 2003 and 2004            (2000 = 100).

(b)     Briefly interpret your results using the CPI that you have calculated.

(c)     Compute the annual inflation rate for the years 2003 and 2004.

Answer 1

1)

	Quantity purchased	Price			Basket cost
Product	Yr-2000	Yr-2000	Yr-2003	Yr-2004	Yr-2000	Yr-2003	Yr-2004
Oranges	5	2.00	2.50	2.60	10.00	12.50	13.00
Flour	10	1.30	1.80	2.00	13.00	18.00	20.00
CD's	2	18.00	20.00	23.00	36.00	40.00	46.00
Draft bear	3	1.00	1.70	1.80	3.00	5.10	5.40
					62.00	75.60	84.40

Year	Basket cost	CPI
2000	62.00	100.00
2003	75.60	75.60/62.00 * 100 = 122
2004	84.40	84.40 / 62 * 100 = 136

2) CPI focuses on prices changes from the standpoint of the consumer's. If there's inflation, the costs of goods will increase and CPI will rise as we noticed and computed in Part-1. When CPI declines, it shows the deflation. In the above calculations as the price of the product increases the CPI also increases

3)

Year	CPI	Inflation rate
2000	100
2003	122	(122-100) / 100 * 100 = 22%
2004	136	(136-122) / 122 * 100 = 11.46%