F Explain the Construction of Indices Used to Measure Inflation

Question 1

CPI (to calc a rate of inflation)

Answer 1

A CPI basket represents the purchasing patterns of a typical urban household

CPI = cost of basket at current prices/cost of basket as base period prices (100)

Question 2

Others

Answer 2

Price index for personal consumption expenditures (business survey)

GDP deflator

Question 3

PPI or WPI (wholesale)

Answer 3

Can be viewed to watch for different stages of stages of processing (raw materials, intermediate goods, finished goods) to watch for emerging price pressure

Question 4

What analysts and policymakers distinguish between types of inflations (2)

Answer 4

Headline: Price indexes for all goods

Core: Price indexes that exclude food and energy (because they’re volatile)(useful measure of the underlying trend in prices)