Question

Why is the core CPI better suited for understanding inflationary pressures than the headline CPI? List and briefly describe three theoretical causes of inflation in the short run. If GDP is currently running faster than potential GDP, can we say, based on that observation alone, that inflation will rise in the near future? Why or why not?

Answer 1

In case of headline CPI , it include the total inflation for the period which comprises the commodities. But In the core CPI basically removes goods which are volatile from the basket of items traking the headline inflation.These commodities which are volatile consist of vegetables, foods, beverages ,light ,oil and the price of such good changes on daily basis therefore they are removed and with the removal the core cpi is best suited and stable as the elimination of swift fluctuation is there.

The 3 main cause f inflation n short run can be

• Due to rising wages which means higher wages higher firm cost and more consumption by consumers
• Demand pull inflation in which the demand grow faster than the aggregate supply
• Another cause is cost push inflation like , the high oil prices feed into increased cost

Yes there is a chance of high inflation in near future because of rising GDP more than the potential GDP as it will lead to lower unemployement and more demand and consumption by the consumer .

Have a good day !