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.


Source: Bureau of Labor Statistics
Home