Consumer Price Index
Introduction
A key economic indicator is an economy statistics. Indicators of an economy allow economic performance analysis and helps in the predictions of performance in the future. Economic indicators are applied in the study of cycles of business. Consumer price index is a leading indicator because it’s an indicator that change before the economy as a whole changes.
Discussion
Leading indicators signal the events of the future. It measures the changes in the consumer goods and services price level that the household purchase. Consumer price index is the guide for benchmark of inflation for the economy of the US. Consumer price index is use as an inflation measure and as an indicator of the effectiveness of the economic policy of the government. It helps in the provision of the information about changes in the prices in the economy of the nation to the government, labor, and business and to citizens who are private and is used in making decisions on the economy.
The consumer price index together with its components is useful in adjusting other series of the economy for price changes and in translation of these series into dollars that are free of inflation. The consumer price index is also used in adjusting income payments of the consumers’ e.g. social security in order to adjust eligibility levels of the income for the government assistance and to provide adjustments of wage of cost of living to millions of workers in America.
10 years analysis of changes and the causes of the changes.
Inflation is defined as an increase in the average levels of prices while deflation is the decrease in the levels of prices. Since year 2000, the data of inflation has been calculated to two decimal places while it is calculated to one decimal place by the government. The data in two decimal places provides a view that is finer compared to the index of the government. The consumer price index is based upon a base of 100 of 1982. The average inflation indicates individual rates of inflation for that year. Changes in the levels of prices have been a great concern to the economy of the US.
The inflation in the US has been averaging between 2% and 3% in each for the past years. Inflation was a great concern in 2004 when it was feared that the price of oil that was rising could lead to prices that are higher in other areas. In 2002, the rate of inflation fell below 2% and this led to fear of deflation but this didn’t happen and in the contrary the prices continued to rise. In the first of 2008, there was a substantial rise in inflation and this led to renewing of fears about further increases. Inflation remained at low levels in the early 200s and began to rise in 2007 and mostly in 2008.
The cases of changes in the consumer index in the past 10 years are the excess spending on the economy that is excess. The spending that cause inflation is when groups, government, people and business try to spend more than what the economy can provide at employment that is full and this causes the prices to shoot. This leads to people wanting to buy services and products but the services and goods are not adequate to satisfy all these buyers. The prices will go up because the producers can sell the products and services at a rate that is much higher because the buyers are so many. What has cause inflation for the past ten years is the capacity of demand and supply. Also what has caused inflation is the supply of money. The interest rates are set by the Federal Reserve Bank and the greater amount of money is borrowed when the interest rates are low while lesser amount of money will be borrowed when the interest rates are high.
Conflicts relative to the indicator.
The economic indicators behavior is decisive in the major financial markets evolution i.e. prices of stock, currency trading and development of interest rates. There is a conflict that the calculation of consumer price index has been tweaked so as to create a sense that is false of economic rectitude and achievement which allow the maintenance of interest rates that are low, borrowing of the government that is massive, and a reliance on borrowing that is dangerous .
Some authors separated core inflation rate from the inflation rate headline and the reason for this is because core inflation doesn’t include energy and food prices. The consumer price index is calculated by the bureau of labor statistics without the impact of energy and food prices but it is preferred at the rate that is core because it is more stable price reading affecting the consumers. Some authors have made owner equivalent rent as a substitute of prices for housing in the consumer index price calculation which lead to masking high prices of housing.
Another contention about consumer price index is that as new products enter the mix of products, they are not considered first as part of any basket, they should into records. This is not the case until they fall to a fraction of the price that they commanded originally, when novel and new technology. Some authors say that the statistics of consumer price index is always manipulated for political purposes because these numbers are produced by political professionals.
There are conflicts in the calculation of the consumer price index which include: it excludes the expenditures that are incurred on the behalf of the households, the market basket which is used in the calculation of the index is changed after every two years and this might not take into account goods and services that are broadly and widely adopted, also it is assumed by the BLS that if a good or service price rises, it will to substitution by consumers. The other problem in the calculation of CPI is that the rent cost or payments of mortgage has a weight of about 32% of the CPI and this is not included in the calculation.
Effects of Consumer price index on the national economy
High consumer price index has effects that are great on the time value of money. The changes of consumer price index that are actual cause changes in interest rates that are corresponding. Inflation erodes the money value of the lenders over the loan term so the rate of interest is increased to compensate for the loss. The consumer price index is affected by a rise in the price of one item e.g. the hike of prices of oil in the US. This will have an effect on food, transport, heating, low retail sales because of the worker’s budget squeeze. In this case, rise in prices of one commodity will lead to CPI alerting investors and traders. The consumer price index will give information that is critical about an economy of a nation that translates to a direct effect on currency of a nation in the forex market.
High consumer price index affects both the poor and the rich in the economy and poses a threat that is big in the economy. When there is inflation, people have to pay more in order to maintain the same level of standards of living. At the period when the consumer price index is high, planning of finance becomes difficult and the reason for this is that with inflation, the money value decreases. Also during this period, planning of retirement becomes difficult because the premiums paid will have to be increased to maintain the same life quality. In an economy with high consumer price index, people save less because the prices of goods and services are high and therefore there is less money left for saving.
Personal or professional tie to consumer price index.
Changes in the consumer price index have effects on investors. An investor with knowledge on how markets are influenced by inflation will benefit more than those investors who do not understand the effect. A person who is poor will be more affected by the rise in the consumer price index than a person who is rich; price of food increase will affect a poor person more and this can be seen through the poor person’s price index that adjusts the components of food and nonfood of the overall CPI to reflect share of food that is higher in consumption of poor people. Changes to high CPI will affect the professionals. E.g. doctors will have few patients because sick people will have no enough money to seek the doctors’ services due to high fees and therefore the doctors’ income will reduce.
Conclusion
The inflation that was high in 2008 showed that there were high prices of commodities. The other years had inflation rate that was modest and from the generally accepted theory this is good for natural growth of the economy. The central bank of the US is in charge of control of the money supply and it should allow a slight price rise to facilitate growth.
References
Income: Current versus constant dollars- US. Census Bureau. Retrieved on 10-5-2011 from http://www.census.gov/hhes/www/income/data/historical/dollars.html
Bureau of labor statistics: Consumer price index. Retrieved on 10-5-2011 from http://www.bls.gov/cpi/
Teenvestor: Investors, economy, inflation. Retrieved on 10-5-2011 from http://www.teenvestor.com/investors/economy/inflation.htm
US Bureau of labor statistics: frequently asked questions. Retrieved on 10-5-2011 from http://www.bls.gov/dolfaq/blsfaqtoc.htm
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