Consumer Price Index
Consumer Price Index
Consumer Price Index
History:
Between 1971 and 1977, the United States CPI increased 47%.
In 2009 the Consumer Price Index fell for the first time since 1955.
USES OF CPI:
The CPI is often used to adjust consumer income payments for
changes in the dollar's value and to adjust other economic series.
Social Security ties the CPI to income eligibility levels; the federal
income tax structure relies on the CPI to make adjustments that
avoid inflation-induced increases in tax rates; finally, employers
use the CPI to make wage adjustments that keep up with the cost
of living. Data series on retail sales, hourly and weekly earnings,
and the national income and product accounts are all tied to the
CPI to translate the related indexes into inflation-free terms
The CPI and the Markets
Movements in the prices of goods and services most directly
affect fixed-income securities. If prices are rising, fixed bond
payments are worth less, effectively lowering the bonds' yields.
Inflation also poses a serious problem to holders of fixed annuities
and pension plans as it erodes the effective value of the fixed
payments. Many retirees have watched their pension payment
amounts lose buying power over time.
CONCLUSION:
The CPI is probably the most important and widely-watched
economic indicator, and it's the best known measure for
determining cost of living changes--which, as history shows us,
can be detrimental if they are large and rapid. The CPI is used to
adjust wages, retirement benefits, tax brackets, and other
important economic indicators. It can tell investors some things
about what may happen in the financial markets, which share
both direct and indirect relationships with consumer prices. By
knowing the state of consumer prices, investors can make
appropriate investment decisions and protect themselves by using
investment products such as TIP.
GDP DEFLATOR:
Choose a country or a region that you wish to study and learn more
about its gross domestic product.
Find the nominal GDP for your chosen region. The nominal GDP is the
country’s gross domestic product measured at today’s market prices.
You can get the nominal GDP for most nations from the World Bank
web site – worldbank.org.
Select a base year that you will use for comparison to the current gross
domestic product.
Step 4: Get the real GDP for your base year
Get the real GDP measurement for your country. The real GDP is the
gross domestic product of your country, measured in dollars from your
base year.
If you have chosen a base year of 1995, for example, the real GDP will
be the current gross domestic product of your region, multiplied by their
1995 prices.
Divide the nominal GDP by the real GDP. Multiply this total by 100 to
find the GDP deflator.
Rearrange the values in the equation to find nominal GDP when you
know the real GDP and the GDP deflator.
Interpretation: