CPI & Energy Prices from 1993-2002

MEASURING INFLATION IN THE UNITED STATES ECONOMY: A REVIEW OF THE CONSUMER PRICE INDEX (CPI), TOGETHER WITH A REVIEW OF ENERGY PRICES FROM 1993 THROUGH 2002

Inflation is a process of steadily rising prices that results in a steadily diminishing purchasing power for a specified nominal amount of money. Inflation occurs where the increase in price is for a good or service for which there has occurred no substantial change in the characteristics of the good or service (Schultze & Mackie, 2002).

Thus, an increase in the price of a potato from five-cents per pound to 10 cents per pound in a situation wherein the characteristics of the potato did not change would represent an inflationary increase in the price of potatoes. In contrast, an increase in the price of an automobile (from the same manufacturer and the same model) from $10,000 to $12,000 might not be inflationary if the automobile available at the higher price included a computerized ignition system, a computer-controlled braking system, and other technological enhancements not available on the earlier version of the automobile.

There are many measures of inflation. A well-accepted measure of inflation in the United States is the consumer price index (CPI). The CPI is available in several versions [e.g., all consumers or one of many sub-sets of consumers; and/or all goods or one of many sub-sets of goods; and not seasonally adjusted or seasonally adjusted).

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ion is that the bundle of goods included in the CPI does not correlate well with the consumption behaviors of the great majority of the people. Further, the CPI is calculated on a base-period model. The use of a current-period model would result in a lower rate of inflation. While advocates of lower indexed transfer payments support use of the current-period approach, this method is no more accurate than is the base-period model. While the current-period model relates prices for current consumption patterns with prices for the same goods in earlier periods, this approach provides an inaccurate picture of the effects of inflation on people over time. The inaccuracies of the CPI and those of the current-period mode differ in perspective and not in the root problem. The root problem associated with both models is that what is measured in one period does not correlate well with majority consumption patterns in the other period. The CPI can be used as a deflator to determine the level of real income. The change in the CPI from period-to-period can be translated into a percent change that represents the rate of inflation from year-to-year. The rate of inflation, in turn, can be used as a deflator to adjust nominal income le

Category: Economics - C