Question

If the CPI is measuring the movement of prices on goods and services commonly consumed in the USA, why is that important to measure? Don't all prices rise over time, anyway? Shouldn't this just be expected? Do certain kinds of price changes bother consumers more than others? What about certain kinds of purchases that can't change along with the economy, like mortgages, car loans or a lease on an apartment?

Answer 1

CPI is measuring the movement of prices on goods and services commonly consumed in the USA. It does not only do that, it also helps us to keep track of the inflation in the economy, because it is further an indicator of the economy's health, of the harm it can cause if its too high or too low. In either of those cases, the government or the central bank takes measures to bring it under control. Also, Phillips curve gives the stable and inverse relationship between the inflation rate and the level of unemployment.

It is true that all prices rise over time, anyway. But the rate of inflation is of importance here. We need to know by how much the wages are increasing with respect to the rise in prices.

In the long run, both consumers and the producers are affected equally due to a rise in the prices. However, prices rise faster than the costs of production. In other words, a rise in prices takes time to seep in to the costs of production. So this provides a flexibility to the producers group (businessmen, traders, merchants, etc) to some extent. Hence price changes do bother consumers more than others. Here it looks like consumers are the losers if the prices rise.

But when we move to the last part of the question, we see that debtors, who have made purchases in the form of mortgages, car loans or a lease on an apartment, stand to gain, because they borrowed when the purchasing power of money was high, and now they have to return it when the purchasing power of money is low.