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Inflation federal funds rate

A consumer price index measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.[1]

A CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices can be computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e. adjust for the effect of inflation) the real value of wages, salaries, and pensions; to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries, the CPI, along with the population census, is one of the most closely watched national economic statistics.

Inflation compared to federal funds rate
A graph of the US CPI from 1913 (in blue), and its percentage annual change (in red)

The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is, in turn, a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, (for example, men's shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers. (However, the growing use of scanner data is gradually making weighting information available even at the most detailed level.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher-level aggregates, and then into the overall index, relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered. Thus the index is a fixed-weight index, but rarely a true Laspeyres index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide.

Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature on index formulas which would approximate this and which can be shown to approximate what economic theorists call a true cost-of-living index. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant standard of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. Nevertheless, in some countries, notably in the United States and Sweden, the philosophy of the index is that it is inspired by and approximates the notion of a true cost of living (constant utility) index, whereas in most of Europe it is regarded more pragmatically.

The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.

The index reference period, usually called the base year, often differs both from the weight-reference period and the price-reference period. This is just a matter of rescaling the whole time series to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.

It is calculated and reported on a per region or country basis on a monthly and annual basis. International organizations like the Organisation for Economic Co-operation and Development (OECD) report statistical figures like the consumer price index for many of its member countries.[2] In the US the CPI is usually reported by the Bureau of Economic Analysis.[3][4][5][6]

  1. ^ "CONSUMER PRICE INDEX". OECD. Retrieved September 13, 2019.
  2. ^ "Inflation (Consumer Price Index)". OECD. Retrieved September 12, 2019.
  3. ^ "Prices & Inflation". U.S. Bureau of Economic Analysis (BEA). Retrieved September 13, 2019.
  4. ^ "Consumer Price Index". U.S. Bureau of Labor Statistics. Retrieved September 13, 2019.
  5. ^ "The Consumer Price Index" (PDF). U.S. Bureau of Labor Statistics. Retrieved September 13, 2019.
  6. ^ "Consumer Price Index Frequently Asked Questions". U.S. Bureau of Labor Statistics. Retrieved September 13, 2019.
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