Inflation Essay

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INFLATION Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the “purchasing power” of money. But inflation does not mean that all prices are rising. Even during periods of rapid inflation, some prices may be relatively constant while others are falling. Measurement of Inflation The main measure of inflation in the United States is the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS). The government uses this index to report inflation rates each month and each year. It also uses the CPI to adjust Social Security benefits and income tax brackets for inflation. The CPI reports the price of a “market basket” of some 300 consumer goods and services that are purchased by a typical urban consumer. (The GDP price index of Chapter 24 is a much broader measure of inflation since it includes not only consumer goods and services but also capital goods, goods and services purchased by government, and goods and services that enter world trade.) The composition of the market basket for the CPI is based on spending patterns of urban consumers in a specific period, presently 2005–2006. The BLS updates the composition of the market basket every 2 years so that it reflects the most recent patterns of consumer purchases and captures the inflation that consumers are currently experiencing. The BLS arbitrarily sets the CPI equal to 100 for 1982–1984. So the CPI for any particular year is found as follows: price of the most recent market Price of the most recent market basket in the particular year CPI = x100 Price of the same market basket in 1982-1984 The rate of inflation is equal to the percentage growth of CPI from one year to the next. For example, the CPI was 207.3 in 2007, up from 201.6

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