cpi report today

cpi report today

The Impact of CPI Report on Today’s Economy

1. Introduction

The main use of the CPI is to aid economic analysis. The CPI is used to determine if the economy is in an inflationary or deflationary period. When the economy is experiencing high inflation, knowing the rate using the CPI is the first step. High inflation has a large number of negative effects on an economy. The concept of there being winners and losers is a good way to approach this. Overall, high inflation reduces the purchasing power of money. This acts as a redistribution of income from those on fixed incomes such as pensions to those who are able to index their incomes to inflation. The reason for this is that in an inflationary period, firms are likely to put up prices frequently, whereas wages may only move at longer intervals. Inflation has a similar effect on savers. They lose because the real interest on their savings is likely to be lower than the rate of inflation, playing into the hands of borrowers who see the opposite occurring for the same reason. Companies incur costs when changing prices, so during an unstable period of inflation, they are likely to be operating at suboptimal efficiency. The costs will be passed onto consumers in the form of higher prices and is bad news for the unemployed whose chances of finding employment in an inefficient economy are reduced.

The Consumer Price Index (CPI) is the measure of the average change in prices over time of goods and services purchased by households. It is one of the most important and widely-followed economic indicators in the world. This is because as a percentage change in the CPI measures inflation. The change in a currency’s value is the most immediate and direct effect of inflation. High inflation may cause central banks to raise interest rates, which in turn affect exchange rates. A lot of a currency’s exchange rate movement is determined by the interest rate differentials, so this is perhaps the reason why the release of the CPI data has the strongest impact on the currency’s value.

2. Understanding the CPI Report

The Consumer Price Index (CPI) report is the most widely used measure of inflation and is considered an economic indicator. A consumer price index measures changes in the price level of a market basket of consumer goods and services purchased by households. The report calculates the price increase of these goods and services in percent form to show the change in inflation rate. A CPI can be used to compare what a market basket of goods and services priced at in a specific year to the valued price of the same basket in other years. This comparison is generally known as the rule of thumb for calculating the difference in inflation for the specific time period, for the specific good or service. A CPI is a useful tool for weighing price level changes in regards to the purchasing of the general public. This is because the effectiveness of the index closely mirrors the opportunity cost model of a household/consumer. This is mainly due to the fact that the weight is found by analyzing the opportunity cost that a specific good or service portrays to a consumer in regards to a different good or service. Given the fact that this method closely resembles a consumer buying substitute goods, the overall changes in price of goods or services can be measured. The method for calculating a CPI involves setting a specific year and finding the cost of the entire market basket of goods and services. The price of the market basket can then be compared to other years by finding the total cost of the same basket at those specific years. This method is cost efficient and does not have to use the data of other years to compare specific years. This is due to the fact that the price of the same basket in other years can be inferred by calculating the previous method. An inflation rate can be determined by comparing the difference of the cost of the same basket between different years and has a good measure of finding changes in the price of this specific market basket over time.

3. Key Findings and Analysis

The increase in the price of energy resources has been a significant factor in the recent increase in the CPI. This has been caused by a decrease in the supply of energy resources. For example, the war in Iraq meant the destruction of oil fields, which are essential in the production of energy resources. A higher price of oil would thus increase the costs of production for all the firms that use energy resources, and this would be reflected in an increase in the price of energy resources.

The increase in the CPI would also be affected by changes in demand pull factors and supply factors. During the recent economic slowdown due to the recession in 2001, there were excess contributions to the war and homeland security. This would mean an increase in government demand for specific goods and services, which would increase the price for these resources.

A price index for a specific good or service is the cost of purchasing a market basket intended to represent a typical consumption of individuals. It is the level of prices of the goods and services in the current period in relation to the price level in a referenced period. These changes have varied success in eroding the purchasing power of households and would be reflected in the changes in specific price indexes.

This would support the hypothesis that inflation is cost push, as the economy is trying to reach and surpass full employment and capacity. Thus, some prices will be bid up for a scarce resource.

The increase in rates for inflation can be correlated with the recent higher rate of increase in the CPI index. This would all result in an increased demand for more goods and services, which would be reflected by an increase in the GDP, which also grew at a 5 percent average for the year ending January 2000. All these factors are consistent with an economy that is growing at a sustainable rate.

Unemployment and underutilized capacity is a macroeconomic issue. It is argued that we are at some level of full employment rather than a specific unemployment rate. This is relevant because unemployment affects the underutilized capacity, and since these measures are quite low, it would be expected that the rate of inflation is increasing. This can be seen in the late 1990s with the unemployment rate at 4% and underutilized capacity ranging from 2-3%.

The key finding in this report is that the index has increased by 0.8 percent for the year ending January 2000 and 1.7 percent for the year ending January 1999. Also, the index has increased at a smaller rate in the past 2 years than in the mid and late 1990s. These key findings are all interrelated.

4. Implications for Businesses and Consumers

Implications for Businesses and Consumers (I): As previously stated the effect of inflation on different price levels can be seen by different groups. Fixed income groups are going to suffer understated inflation as the CPI shows a lesser rate and cost of living increase. Increased income groups tend to spend more on services whose prices tend to raise at a higher rate than those of manufactured goods. Implicit price deflators would show a more compressed rate of inflation. This therefore would have a negative effect on the demand for labour as employers attempt to compensate for raised costs by making reductions in the real wages of workers. This could eventually cause stagflation and low unemployment for the reasons above. High increase in profits, interest rates, and rent would occur due to the overstatement of inflation and the inflation will later be fought by deflation and recession.

The CPI does not measure the level of prices or the extension of market in an accurate fashion. Shortages cause prices to go up whether there is inflation or not, thus inflation increases in times of non-full employment as people are likely to have more money. This will also pose problems when it comes to international statistics given that inflation rates between countries will undoubtably vary. The CPI also causes confusion with indexation which is a method of regulating income according to the change in price levels usually implemented by the government. This is because it measures the change in price of products but not the change in money which could be spent on these products.

5. Conclusion and Recommendations

It has been shown that the UK’s recent inflation is a cost-push phenomenon. The cause of the rise has been increasing production costs faced by firms. The relatively low unemployment and lack of skilled workers has increased real wages. There has also been rising oil prices and larger taxes to pay for public services. All of these factors have pushed aggregate supply to the left and caused inflation and a decrease in national output. This has left Britain with the unenviable situation of stagflation. With this in mind, it has been suggested that a moderate level of inflation may not have such negative effects as higher or erratic inflation. This is a debatable point but the UK government’s inflation target is to have the European average and the CPI report is a constant reminder as to where the UK stands in relation to this goal.

This essay has shown that inflation has a major impact on economic participants. It is particularly harmful to fixed income recipients. Also, the savings shortfall in real interest for the retired is a big cost. Similarly, share and house price rises can give windfall gains to some but cause others to have to pay more for the same goods. It is also a great tax distorter; price rises push people into higher tax brackets, paying more tax on income which hasn’t increased in real terms. A further problem with erratic inflation is an increased uncertainty throughout the economy. The winners and losers from price rises are unpredictable. This leads to a misallocation of resources as businesses try to second guess where the price rises will occur and change their production accordingly.

The latest figures on the Consumer Price Index are a confirmation of what many people surely suspect. There is a slow and barely perceptible improvement in the economy. The rate of inflation is at the lowest for forty years and the underlying rate is below the 2% target. Inflation has become a global phenomenon which in recent years has seen higher rates in the UK economy than other G7 countries. The causes of this deflationary trend are varied and complex and it is uncertain whether it is a herald of long-term stability or a portent of worse to come.