It is an
inflationary indicator that measures the change in the cost of a predetermined
basket of products and services, (including housing, electricity, food, and
transportation ) by comparing it with a certain fixed base period. The CPI is
used as a benchmark for making adjustments in Social Security payments, wages,
pensions, and tax brackets to keep them in tune with the buying power of the
dollar. It's often incorrectly referred to as the cost-of-living index.
It is the most widely known index for measuring economic performance and inflation in the United States. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. The contents of the “market basket” are determined by the Consumer Expenditure Survey of about 15,000 families and their spending habits over a period of time. The BLS (bureau of labour statistics) collects price information from 23,000 retail and service businesses. The CPI includes sales taxes, but excludes income taxes and the prices of investments such as stocksand bonds.More important, the CPI does not include sales price of homes. Instead, it calculates the monthly equivalent of owning a home, which it derives from rents.
Changes in CPI are used to assess price changes associated with the cost of living.The U.S. Bureau of Labor Statistics measures two kinds of CPI statistics: CPI for urban wage earners and clerical workers (CPI-W), and the chained CPI for all urban consumers (C-CPI-U). Of course , the C-CPI-U is a better representation of the general public, because about 87% of the population comprises of the urban wage earners .
Merits of CPI :
1)The CPI is a measure of inflation, . Large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.Therefore, it is used by the Federal government to determine whether economic policies need to be modified to prevent inflation.
2) Secondly, CPI is used to adjust prices in other government economic indicators, such as Gross Domestic Product, or GDP.
3) Also. the CPI is used to adjust benefit levels for recipients of Social Security and other government programs.
CPI has some demerits too which are as follows:
1) The predetermined market basket includes primarily items which do not see price spikes due to innovation, such as food, apparel, utilities, and education.
2) substitution bias (variations in price can cause consumers to respond by substituting on the spot, but the basic measure holds their consumption of various goods constant)
3) product quality bias : The CPI measures the cost of purchasing a product without accounting for the quality of the product.
4) some of the sale items are sometimes overweighed in sample rotation)
It is the most widely known index for measuring economic performance and inflation in the United States. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. The contents of the “market basket” are determined by the Consumer Expenditure Survey of about 15,000 families and their spending habits over a period of time. The BLS (bureau of labour statistics) collects price information from 23,000 retail and service businesses. The CPI includes sales taxes, but excludes income taxes and the prices of investments such as stocksand bonds.More important, the CPI does not include sales price of homes. Instead, it calculates the monthly equivalent of owning a home, which it derives from rents.
Changes in CPI are used to assess price changes associated with the cost of living.The U.S. Bureau of Labor Statistics measures two kinds of CPI statistics: CPI for urban wage earners and clerical workers (CPI-W), and the chained CPI for all urban consumers (C-CPI-U). Of course , the C-CPI-U is a better representation of the general public, because about 87% of the population comprises of the urban wage earners .
Merits of CPI :
1)The CPI is a measure of inflation, . Large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.Therefore, it is used by the Federal government to determine whether economic policies need to be modified to prevent inflation.
2) Secondly, CPI is used to adjust prices in other government economic indicators, such as Gross Domestic Product, or GDP.
3) Also. the CPI is used to adjust benefit levels for recipients of Social Security and other government programs.
CPI has some demerits too which are as follows:
1) The predetermined market basket includes primarily items which do not see price spikes due to innovation, such as food, apparel, utilities, and education.
2) substitution bias (variations in price can cause consumers to respond by substituting on the spot, but the basic measure holds their consumption of various goods constant)
3) product quality bias : The CPI measures the cost of purchasing a product without accounting for the quality of the product.
4) some of the sale items are sometimes overweighed in sample rotation)
there are few problems with irregular punctuation and article can end on a conclusive note.
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