Lecture 7.5
INFLATION


1. Consumer Price Index (CPI)

  • Based on a basket of goods purchased by typical urban household
  • Base period (CPI=100)
  • Annual rate of inflation

1.1 Problems with CPI

2. GDP Deflator

  • This price index includes every item in the GDP
  • The general price level (P)

3. Real vs Nominal variables

  • Real GDP
  • Real wage
    • Link to labor productivity?
  • Real interest rate

4. Losses and gains from inflation

    If inflation rises unexpectedly:
    • Fixed-income earners lose (WHY?)
    • Borrowers gain (WHY?)

The Official Data Keepers

The Bureau of Labor Statistics maintains a FAQ site on the CPI. Discusses how the CPI is measured, its various components, and how it is used.

"... prices are falling in industries that are facing tough global competition, such as cars or computers. Many manufacturers are finding they can produce in places like China or Mexico where labor costs are lower, which is helping to push prices lower. But prices are still rising in sectors where offshore production isn't a competitive threat, such as health-care or education."

- Wall Street Journal
January 17, 2003


Home