Consumer Price Index: Assignment

Topics: Inflation, Consumer price index, Price index Pages: 5 (1212 words) Published: January 9, 2013



(i) Explain the concept of the consumer price index (CPI) and explain how it is measured. What is the latest CPI figures in Australia (Sept 2012) and what were the main factors influencing the CPI movements in this quarter.

(ii) Is the CPI an accurate measure of inflation? Explain the importance of inflation when calculating the real interest rate.

(iii) What are the economic costs of inflation?

(iv) Is deflation a potentially more serious problem than inflation?

In writing your answer you should refer to Chapter 1 of the textbook and the article “Inflation, deflation and all that” available on the Macroeconomics 1 website in Week 1: Unit 1 readings. For the latest statistics refer the Australian Bureau of Statistic website:

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Submission question 1

The CPI, which is the abbreviation of the consumer price index, is an important index of measuring the cost of living. According to Australian Bureau of Statistics (ABS), “In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are resident in the eight State/Territory capital cities.”(Australian Bureau of Statistics, 2012). The calculation of CPI requires three steps and they are conducted by the ABS. The CPI for a specific period measures the cost of consumption of goods and services in that period which is related to that in the chosen base year. (Bernanke, Olekalns&Frank 2011)

According to ABS, The CPI figures in Australia in September 2012 is 182.9, it increaed1.4% in this quarter, compared with an increase of 0.5% in the previous quarter (June 2012). The ASB also states “The most significant price rises this quarter were for electricity (+15.3%), international holiday travel and accommodation (+6.6%) and medical and hospital services (+4.5%). The most significant price falls these quarters were for automotive fuel (-3.9%) and motor vehicles (-1.0%).”(ABS 2012)

One of the most important aims of CPI is to measure the change in the cost of living and the change in the value of currency. In order to measure these changes, the inflation rate is needed. It is calculated by using the CPI figures. The inflation rate refers to the percentage change of CPI during a specific time period.

The CPI can also be called the cost of living index. When calculating the amount of money that the households need to pay in order to achieve a certain living standard, CPI has two main limitations. The first one is that CPI cannot measure all the cost of living. Moreover, the factors that contribute to the cost of living sometimes cannot be measured accurately. Due to the two reasons, CPI is not a very accurate measure of inflation. (Bade&Parkin 2010)

“The real interest rate is the nominal interest rate...

References: Bade&Parkin 2010 “ Foundations of Macroeconomics 4th ed.” pp144-145, p148, pp317-318 Pearson Education, Inc
Bernanke, Olekalns &Frank 2011 “ principles of Macro economics 3rd ed.” p25,pp26-28,pp31-33, Australia, McGraw-Hill Australia Pty Ltd
Steve Saville 2008 “The real interest rate”
Mr. GR Stevens 2002 “inflation, Deflation and All That” Australian Business Economists 2002 Forecasting Conference Dinner, Sydney, p11
Australia bureau of statistics “6401.0 - Consumer Price Index, Australia,”2012
Australia bureau of statistics “Australian Consumer Price Index (CPI)”2012
Australia bureau of statistics “Consumer Price Index FAQs “What is a Consumer Price Index (CPI)?”2012
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