What is it?
a general picture of price
increases over time.
How is it determined?
by measuring the prices of only
consumer goods and services - in a
“basket” of price quotations.
samples a variety of urban and
rural centres across the country.
divided into 8 categories - each assigned
a weight to indicate spending influence.
Shelter - 27.9%
Transportation (including repair costs) - 18.3%
Food - 18%
Recreation and education (including tuition) - 10.4%
Household operations and furnishings - 10%
Clothing and footwear - 6.6%
Alcoholic beverages and tobacco products - 4.5%
Health and personal care - 4.3%
Function and Uses:
C.O.L.A. (cost of living allowance) and “indexing”
measurement of inflation
deflator - to obtain
estimates” of income
and expenses. (That is
what a historical $
value would be equal
What is inflation?
Two important factors
i. rising prices (of course)
but this results in
ii. declining spending power
Therefore sticking $100,000 in the
bank for 20 years is not really a
good retirement plan.
Types of Inflation
Demand Pull -increased aggregate demand
causes the overall price of
goods to rise.
We have all
ready seen this
many times on
2. Cost push - decreased aggregate supply
due to increased costs of
Again we have all ready had the
pleasure of seeing this many
times on the basic supply graph.
Does not reflect every household everywhere in
Quality improvements of goods not measured - i.e. may
be more expensive but much better.
fixed weights may not apply to all consumers.
no allowance for substitution in response to price changes.
therefore is not always
work as a cost of living
The CPI will often be quoted simply as itself and as
the CPI excluding certain volatile or dominant items
such as energy.
- this allows analysts to better
understand the cause of inflation.