1. Measuring Inflation using a Price Index

2. Historical Inflation Germany: “hyperinflation” after World War I
Currency became worthless
USA: Late 1970s—Oil Crisis-- 13% inflation
Called “Stagflation”
USA: low inflation since [ %]
USA speed limit: target for inflation is under 2.5%

3. Some factors: Technology & Globalization
Stagflation
Low inflation
Deflation

4. What is a Price Index? A price index is used by economists to:
measure the inflation rate
convert nominal numbers => to real numbers
A price index will choose a base year (which always = 100)
Use the prices from base year for all goods/services

5. CPI Index Consumer Price Index (CPI) measures consumer inflation
CPI uses a consumer market “basket” of goods & services
Government prices market basket each month
Compares cost of the new basket to old basket
2011: Market Basket cost $1,000
2012: Market Basket cost $1,100
So inflation = +10.0%

6. What is in the CPI’s Market Basket?
17%
Transportation
42%
Housing
15%
Food and
beverages 6%
Education and
communication
Medical care 6%
Recreation 6%
Apparel 4%
Other goods
and services 4%

7. CPI Index Calculation X 100 = CPI Index Current $ Value Basket
$ Value Basket in Base Year
X = CPI Index
Price ($) Value of Basket
$10
$12
Use 2005 as base year
CPI Index = $10/$10 X 100 = 100
CPI Index for 2007
($12/$10) X = 120
End Result From 2005 => 2007 Inflation rose +20%
(120 – 100)/100 X 100 = +20%

8. % Change with Price Index
If a price index rises from 100 to 120?
What % gain did you make?
Formula: [(Ending Index – Beginning Index) / Beginning Index] * 100
( )/100 * 100 = +20%

9. Worksheet
Creating an Index