consumer price index
Consumer Price Index
An index that shows price fluctuations of goods and services purchased by consumers. It is calculated using the Laspeyres method.
U.S. CPI
In the United States, the Department of Labor surveys and calculates the consumer price index. Specifically, an organization under the Department of Labor called the Bureau of Labor Statistics surveys and publishes it. The U.S. began surveying as early as January 1913. The Federal Reserve System, the U.S. central bank, was founded in 1913, and from then on, the CPI began to be surveyed to establish monetary policy.
Data Distortion
Distortion from substitution bias
Some goods' prices rise a lot, while others rise less. Consumers reduce consumption of goods whose prices rose sharply and increase consumption of goods whose prices rose less or fell. In other words, consumers consume goods that became relatively cheaper instead of goods that became relatively more expensive. The consumer price index, however, is compiled assuming a fixed basket of goods, so it excludes the possibility of substitution and thus overestimates changes in the cost of living.
Emergence of new goods
Suppose the iPhone's emergence makes people stop buying TVs and computers. Thus, even though people's purchasing power rises, the CPI does not rise. This logic was dominant during the New Economy era.
Regulation
From 1994, environmental regulations requiring the mandatory addition of new additives to gasoline to reduce air pollution were introduced. These regulations raised gasoline prices.
Topics: Inflation
Category: Wiki/Economy