Inflation and Consumer Price Indices

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  • Topic: Inflation, Consumer price index, 1973 oil crisis
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  • Published : May 18, 2013
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Inflation and Consumer Price Indices
Maryam A. Bello and Hilda N. Chukwu
Multimedia University

A literature Review5
Statement Of The Problem6
Objectives Of The Study10
Summary and Conclusions10

Consumer price index has been confused by a lot of people in recent times. CPI, which is one of the most frequently used statistics to identify periods of inflation is also sometimes viewed as an indicator of the effectiveness of government economic policy. The government, business, labor, and private citizens uses price changes information provided by the CPI in the Nation's economy to guide them in making economic decisions. The Consumer Price Index, as implied by the name is an index, or “a number used to measure change. Investopedia (Investopedia, N.D) defines CPI as "A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care." This paper attempts to explain what inflation is, types of inflation and how it is measured by the Consumer Price Index (CPI), which is the most commonly used measure of inflation. The paper also attempts to discuss the inflation behavior in Malaysia.

Keywords: Inflation, Consumer Price Index, types of inflation.

CPI and inflation has always been thought to be same because CPI is widely used as a measure of inflation. However the current rate of inflation is not given by CPI itself. To know the increase or decrease in the prices of goods and services, the index must be used in the calculations. The Bank of Canada (2010) defined inflation as "a persistent rise over time in the average level of prices in the economy." As demand for goods and services exceeds the economy's capacity to supply those goods and services, prices tend to go up while an excess supply of goods and services tends to put downward pressure on prices. It's important to understand the difference between the many different types of inflation. When inflation is more than 50% a month, it is known as hyperinflation. There is no known history of hyperinflation in Malaysia, but it is known to have occurred in Germany (costantino bresciani-turroni, 1937) before World War II, and in Zimbabwe (michael wines, 2006) in the 2000s. Stagflation is when inflation occurs despite slow economic growth and the last time this happened in the U.S. was in the 1970s. When inflation affects different parts of the economy, it's known as asset inflation because it affects just one asset. This occurred with stock portfolios when the Dow reached its peak (Google finance 2007) of 14,164.43 on October 9, 2007. Asset inflation mostly occurs during oil-price shock. This is usually as a result of gas and oil demand predictions done by the commodities trader that the demand would go up during summer vacations. When traders become more concerned that oil supply would likely be cut off, just as during the Iran threat to close the Straits of Hormuz in 2012, (Aljazeera, 2012) traders will increase the price of oil. And as a result, price of food, which is usually transported long distances would likely be hiked.

A literature Review
Cheng and Tan (2002) examined inflation in Malaysia using quarterly data over the period from 1973QI to 1997QII. The study used the Johansen (1988) cointegration, vector error-correction modeling, impulse response functions, and variance decomposition of the Sims (1980) approach. They included 11 variables in their analysis, namely CPI, money supply, interest rate, income, private expenditure, government expenditure, exchange rate, trade balance, capital inflows, the rest of inflation in ASEAN, and inflation in the rest of the world. The empirical results of their study showed that external factors such as exchange rate and the rest of inflation in ASEAN are relatively more important than domestic factors in explaining inflation in Malaysia. Cunado and De...
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