The accuracy of the CPI (consumer price index) as a measure of the rate of increase in the cost of living has long been under scrutiny, with many studies showing that it overestimates figures - albeit to different extents. One of these, “Measurement error in the consumer price index: where do we stand?” (2003) by David Lebow and Jeremy Rudd, provides a comprehensive analysis of the five causes of the bias in the CPI and a new set of estimates for them. They claim to be more accurate than previous estimates as a result of procedural improvements at the BLS (Bureau of Labour Statistics), new research and alternative judgment of existing information. This essay will briefly explain the report’s argument, giving further detail about the two main sources of bias; upper level substitution and new or improved goods entering a market. It will then explain the practical implications of this for the government and the economy given the CPI’s wide range of uses, making clear the need for policy makers to pay more attention the issue.
In their report, Lebow and Rudd conclude that the USA’s CPI overestimates increases in the cost of living by 0.87%, within a range of (0.3%-1.4%). This figure can be broken down into five constituent categories of bias: new outlets, weighting, lower-level substitution, upper-level substitution and quality change or new items. The former three have a significantly smaller effect on the bias, making up only 0.2% of the 0.87% estimate. New outlet bias, said to make up 0.05%, occurs because the CPI only uses changes in quality to explain price differences between old and new outlets.This fails to take into account shifts in buying patterns which often cause price changes. Weighting bias, which had prev...
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...o make informed decisions. They should also encourage research into these areas and improvements in how the CPI is collected, for example using the PCE instead of the CEX, and calculated, for example using a geometric mean aggregation formula instead of Laspeyres.
“Measurement error in the consumer price index: where do we stand?” has provided a detailed analysis of the causes of bias in the US consumer price index and the uncertainty behind both previous and their own estimates. Of these, upper-level substitution and quality or quantity changes have proven both the most significant and the most controversial. With the figure for the bias calculated at a plausible 0.87%, it has been made clear the practical implications of their argument across the economy, and that policy makers must keep track of bias estimates and inform their choices acknowledging them.
Carnevales’ main point was on the flaws of the National Bureau of Labor Statics (BLS) and how it does not give full information or data. In fact, Carnevale says that “The BLS education demand numbers, ranging from designation of college and non-college to their failure to reflect rising education
Stone, Chad, Danilo Trisi, Arloc Sherman, and William Chen. "Center on Budget and Policy Priorities." A Guide to Statistics on Historical Trends in Income Inequality. Center on Budget and Policy Priorities, 6 Nov. 2013. Web. 03 Dec. 2013. .
“Yes, It’s the economy, stupid, but is it demand or supply?” was published on January 24, 2014 by Paul De Grauwe for CEPS Commentary. The ‘wrong medicine’ as De Grauwe says, continually goes to the problems, but never seems to solve them correctly. Before 1970, there was a focus on demand shock, in 1970 there was a focus on demand shock for a supply shock, and in 2008-09, there is a focus on supply shock for a demand shock. Development on different models started to try to predict the shocks, and the creation of the supply-side model to replace the Keynesian model began. Repeating of old mistakes, it seemed in 2008 that the economists had not learned a thing from the 1970s. Economists do not seem to always learn from old mistakes, but in the end, sometimes it takes several repeats and misdiagnoses to get things done correctly.
...formula is based on an arithmetic mean of the price levels in the two selected cities. In order to calculate the index for the two cities examined, the average price of each item must first be calculated. The prices are then compared in each town to the average prices. There is still another element to the calculation of the CPI that we haven’t discussed just yet, and that is not every product in the survey is as important as the other. For example, the cost of a vehicle is more important in determining the index than the price of a loaf of bread. The weights have been chosen on the basis of research that indicates while there are certainly differences amongst the various national spending patterns; there are some average figures that most companies accept. The chart below indicates the sum of individual weights allocated to each item composing the index categories.
"Macroeconomics/Employment and Unemployment." Macroeconomics/Employment and Unemployment - Wikibooks, Open Books for an Open World. N.p., n.d. Web. 04 July 2017.
The dollar index, which gauges the dollar against other major currencies, has attracted much attention recently due to its fifteen year low. A low that reflects the dollars 60% fall since 2001 (Paul, What the Price of Gold is Telling Us). The low dollar is of interest to citizens, i.e. consumers, because it means that your goods are going to cost more while your paycheck remains the same and foreign firms are buying U.S. goods and resources at a deep discount. Father of Reaganomics, Economist Jerome Corsi stated:
It was said that once-in-a-century advances in technology are transforming our economy. The computer chip is doing for today's knowledge economy what electricity did for our industrial economy a century ago. Synergies in technology are driving acceleration in productivity growth that enables us to grow faster with less inflation. Economic progress is speeding up; the speed limit is rising. “Real GDP growth has averaged 4 percent for the past four years, with declining inflation. This almost doubles the 2 percent to 2.5 percent not long ago considered the maximum noninflationary potential. But we've been growing faster than potential and sustaining the unsustainable for four years and counting. Sounds odd, doesn't it? Our faster output growth is based primarily on faster productivity growth and secondarily on faster labor force growth”. Productivity growth now appears to be at least 2.5 percent and rising. An increase from 1 percent to 2.5 percent is an increase of 150 percent, a huge jump with profound implications if sustained. Last year was encouraging. Productivity raised over 3 percent for the year and over 5 percent in the second half. It was said that the United States entered the 21st century with its economy on a roll. GDP growth averaged more than 3 percent a year in the 1990s. The country created 17 million jobs, driving unemployment down to a 30-year low of 4.1 percent. In the 1999-2000 the economy wasn’t doing so bad the unemployment rate was down, there were more jobs available, and production was doing well. When 2001 stated and even before then the economy was going down, many people were being laid off and so on. Then it happened the September 11th attack on the US, this attack has left the
I. First Argument: More and more families are falling behind because the minimum wage has not kept up with the rate of inflation.
In chapter nine ‘Why is there an employment/inflation trade-off?’ the authors critique the natural rate theory. They agree with the fact that wage setting is influenced by expectations of inflation but disagree that inflationary expectation affects ‘wage and price setting one for one’
Puthnam J.J. and Allshore J.E. (1999). Food consumption prices and expenditures, 1970-1997. Food and Rural EACONOMIC Division, Economic Research Service, USDA Statiscal Bulletin 965
“Macroeconomic indicators include economy-wide phenomena such as unemployment rates, national income, rates of growth, gross domestic product, inflation, and price levels” (Page & Stevens, 2005).
ROBINSON, Joan (1965b). “The General Theory after Twenty-Five Years”. Collected Economic Papers, vol. III, pp. 100-2.
The recent global financial crisis that affected not only America but also Europe and other parts of the world resulted in massive unemployment. This is due to the high costs of operation that many corporations faced forcing them to cut on labor costs. There is need for European government interventions to avert this social crisis and prevent the occurrence of such a crisis in future. Unemployment has hit the service sector harder than other sectors with the following being the most affected: automotive, construction, tourism, finance and real estate. The global financial crisis has also increased consumer prices thus pushing inflation. According to McCathie, “the increase in July consumer prices to 1.7 per cent pushed inflation in the currency bloc up towards the European Central Bank’s target of keeping inflation at below, but close to 2 per cent. Eurozone consumer prices had stood at 1.4 per cent in June” (McCathie, 2010).
In recent quarters consumers based their purchase decision on price and perceived value. This trend has increased the sale of private brand baking goods at expense of its branded competitors. According to the food institute, sale of food for at-home consumption have skyrocketed in recent years. These food retailers only accounted for 1.8% of food in 1991 and by 2003 their percentage rose to 11.1%. USDA projects that the consumer price index for food will rise from 3.0% to 4.0% in 2005. CPI for all types of food rose 3.6% for the first nine months of 2004 and it is projected to increase even higher.
Seen another way, this apparatus measures the "genuine"— that is, balanced for inflation—estimation of income after some time. Note that the segments of the CPI don't change in cost at the same rates or even fundamentally move the same course. For instance, the costs of auxiliary training and lodging have been expanding a great deal more quickly than the costs of different merchandise and benefits; in the interim fuel costs have risen, fallen, risen again and fallen once more—every time strongly—in the previous