Question

The consumer price index is an inadequate measure of inflation. Discuss this statement with reference to ONE alternative measure. Please endavour to discuss, thankyou

Answer 1

The CPI does not measure rising prices but rather tracks patterns of consumer spending which change as prices change. The CPI is not even commenting on the falling money value. If it did the CPI looks a lot different. The most noticeable is the indicator of monetary inflation provided by the Federal Reserve. M2 tracks the supply of US dollars, which includes currency, deposit checks, deposit deposits, and mutual funds on the money market. The more money it's produced and put into circulation, the less it is worth. And the Fed has recently taken in a lot of money

Quantitative Easing, the unparalleled bond buying program of the Fed, produced $116 million an hour for the whole of last year. It makes no sense that inflation calculation by the BLS was just 1.5 percent last year, while monetary inflation rose 4.9 percent at the same time. It is crucial to have an accurate measure of inflation because the increasing prices have a negative effect on consumers, particularly those on fixed incomes. In addition, CPI trends are used by the federal government and the Federal Reserve to help set tax, monetary, and fiscal policies which affect economic growth.Since the CPI is secretly measured, is not nearly equivalent to monetary inflation, and does not even meet its own concept of inflation, we will use our common sense to measure the value of our cents, not the CPI.

The consumer price index may not accurately reflect an individual's level of inflation, since it calculates price level and inflation based on a typical customer. To put it simply, if an individual's purchasing habits vary from those of an average customer, the numbers recorded by the CPI might not be of special significance to that person.

The CPI is not entirely reflective - it would be misleading for the 'non-typical' household, e.g. 14 per cent of the CPI index is allocated to the cost of motoring - not applicable to non-car owners.

Patterns to spend: e.g. Single people have different patterns of spending from households with one or more children Changing quality of goods and services: as the price of a good or service may increase, this may also be followed by changes in product quality / performance New products: the CPI is slow to adapt to new products and services – the CPI basket is updated every year but only a few items are introduced.

Alternatives to CPI are:

The GDP index. In light of the CPI's issues, other inflation indicators, one of which is the chain-weighted price index for GDP, are worth looking into. This collection, collected by the United States The Bureau of Economic Analysis (BEA) of the Department of Commerce is a measure of the cost of all the goods and services produced in the USA.

Annual GDP growth is measured using the superlative Fisher Ideal equation. The GDP calculation has usually risen less rapidly over the past few years than the CPI. Since the GDP index is more detailed than the CPI (it contains prices for more items), is built according to traditional price index theory, and seems less biased than the CPI in recent years (due to its less rapid growth), it seems to be a better indicator of inflation.

The PCE index. Many problems with the GDP index arise from its inclusion of rates for goods not purchased by customers. Therefore, the price index for the GDP series market part the chainweighted PCE price index, also compiled by the BEA may seem a good alternative to the CPI. The CPI and the PCE are aggregate price indices for a very similar set of products and services and, to a large degree, the PCE uses the same data as the CPI to pricing individual items. Given these similarities, growth in the PCE is typically marginally lower than growth in the CPI and the PCE like the GDP index appears to reduce much of the upward bias of the CPI.