Professional Documents
Culture Documents
Inflation
Price Index
A price index is a number that represents overall prices for a given period of time say a year.
Principal source of information for trends in consumer prices and inflation. Used for escalation of contract amounts and payments among individuals and organizations. Used to adjust payments to: Social Security recipients Federal and Military retirees Food Stamps and School Lunches Used to adjust individual income tax brackets.
Measures the overall cost of the goods and services bought by a typical consumer.
The CPI
1. Fix the basket: select the most commonly purchased items by conducting surveys.
1 computer
2 tuitions
The CPI
2. Find the prices of the items included in the basket: scouts go every month looking for these prices.
Ticket = $600
Computer=$1200
Tuition =$20,000
Doctor Visit=$100
The CPI
3. Compute the cost of the items in the basket each year.
3 Tickets = $1800
2 Tuitions = $40,000
(c) 2000,2001, 2002 Claudia Garcia - Szekely
$43,500
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The CPI
4. Choose a base year the benchmark for comparison- and compute the cost of the basket in the base yearSay 1995
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$43,450
$1,500
(c) 2000,2001, 2002 Claudia Garcia - Szekely
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The CPI
5. Compute the CPI.
CPI (Year 2000) = Cost of Basket in 2000
x100
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CPI (Year 2000) = Cost of Basket in 2000 Cost of Basket Base Year
(c) 2000,2001, 2002 Claudia Garcia - Szekely
x100
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CPI revisions occur approximately every 10 years. The most important revision is the introduction of a new market basket The last revision to the CPI started in 1998 and completed in 2000.
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2 3 4
2 3 5
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2 3 4
2 3 5
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2 3 4
2 3 5
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Calculate Cost of basket in each year Year Price X Quantity X Price Y Quantity YPx *4 Py*2 Basket
4 5 6
2X 2 3X 3 4 5
4+ 4 8+ 6 12 + 8
8 = 14 = 20
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CPI
(8/8)*100 = 100
8
14
(14/8)*100 = 175
(20/8)*100 = 250
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(c) 2000,2001, 2002 Claudia Garcia - Szekely
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Inflation rate
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FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks); HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry); TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance); MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services); RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Also included are various government-charged user fees: water and sewerage charges, auto registration fees, and vehicle tolls. The CPI also includes taxes: such as sales and excise taxes that are directly associated with the prices of specific goods and services. The CPI excludes taxes: such as income and Social Security taxes that are not directly associated with the purchase of consumer goods and services. The CPI does not include investment items: such as stocks, bonds, real estate, and life insurance. Because these items relate to savings and not to day-today consumption expenses.
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Inflation
Inflation refers to an INCREASE in the price level from one period to the next. Inflation can be high (20%) or low (2%) When inflation drops from 20% to 2% prices still INCREASE, but not as much as the previous time period.
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Deflation
Deflation refers to a DECREASE in the price level from one period to the next. Deflation shows up as a NEGATIVE number for the inflation rate: a 5% inflation means that prices DECREASED by 5%. This is not only a slowing down of inflation but a DROP in prices.
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5 3
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2
(c) 2000,2001, 2002 Claudia Garcia - Szekely
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2000 $100
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If you want to know what is the equivalent in todays dollars of an $80,000 salary in 1931, 1. Find the ratio of prices: CPI in 2000 / CPI in 1931 = 172.2/16.7 = ___ 2. Multiply 80,000 by that # =________
Example
824,910.2 33
The Presidential salary from 1909-1949 was $75,000 annually (President Hoover 1929 - 1933) CPI = 17.1 George W. Bush salary is $200,000 annually. CPI = 179.9
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2002 $? 789,035
$ 19,011 ?
President Hoover made $75,000 while the equivalent of Bushs salary is $19,011
(c) 2000,2001, 2002 Claudia Garcia - Szekely
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