Question

In detailed 3 paragraphs explain the topic of Inflation, CPI and how important are they for the economy and for our day to day economic desicions, and life.

Answer 1

Inflation: this is the rise in price level in two different periods. It depends on consumer price index (CPI); if the CPI of year 12 is 135 and in year 13 is 155, then the rate of inflation would be as: Inflation of year 13 = [(CPI of 13 – CPI of 12) / CPI of 12] × 100 = [(155 – 135) / 135] × 100 = (20 / 135) × 100 = 14.82%.

CPI: this is the change in price level. The change may be increased or decreased. A fixed basket of various goods is chosen in this calculation and the respective prices in different periods are multiplied and aggregated to get the CPI. This is the weighted average calculation of price index.

Importance: Both these are important in economy, since they help to implement monetary and/or fiscal policy; if inflation is high, contractionary monetary policy is imposed to bring down the price level by reducing the money supply. These are important in our daily life, since they are the indicators of cost of living – at higher inflation cost of living would be high and the decision of saving is taken by households; people restrict their consumption today and take plan for future life.