Question

Discuss how we measure inflation in the U.S. Identify some of the potential problems with this measure as well as the solution that the Bureau of Labor Statistics has come up with.

Answer 1

Consumer price index is a common barometer which is under speculation to measure inflation in the US. The monthly CPI measures have an inevitable impact on financial markets. It is used widely not only in US but all the developed nations as well. However, there are issues with this eminent measure as a barometer for inflation or cost of living.

CPI is calculated as weighted index of goods purchased by the consumers. There is an inherited flaw in the measure as the basket of goods which donot cover all the production and consumption goods.

Even Bureau of Labour Statistics has admited that CPI doesnot cover factor substitutes in the sense when goods become expensive people find thier substitutes more efficient to consume.

New products are not accounted and same basket of goods are used as a measure of CPI which had been used in the previous years.

Another criticism accounts for the fact that sudden economic shocks are not able to be represented in the CPI while it contains goods which are sensitive to the same.

CPI is also criticised on the grounds that it is inclined to measure urban consumer habits and less rural goods are given importance in the consumer basket.

Thus, these factors should be given importance and effective panacea should be derived as CPI plays an important role in considering social security payments and other funded programs.