The Consumer Price Index The Consumer Price Index (CPI) is a measure of the average price of
Question:
The Consumer Price Index The Consumer Price Index (CPI) is a measure of the average price of goods that a typical household consumes. To calculate the CPI, a basket of 700 goods and services that reflects the U.K. society's buying habits is used to construct the index. Assume that U.K. consumers buy only meat and movie tickets as their basket of goods and services. Below is a representation of the kind of data that the Office for National Statistics collects to construct the consumer price index. In the base year, 2010, both the prices and quantities of goods and services purchased are collected. In subsequent years, price changes are calculated for the same set of goods and services. The Office uses the Inflation Calculator to measure by how the cost of goods and services has changed over time. The Inflation Calculator can calculate the future cost of goods and services based on price changes from a date in the past. Alternatively, it can calculate the past cost of goods and services based on price changes from a date in the future.
The data: In an average week in 2010, the Office for National Statistics surveys thousands of households and determines that the average consumer purchases two pounds of meat and one ticket in a month. In subsequent years, the price per pound of meat and per movie ticket are found below:
a. What is the cost of the consumer price basket in 2010?
b. What is the cost of the consumer price basket in 2011 and in subsequent years?
c. Represent the cost of the consumer price basket as an index number in the year 2008 to 2013. Set the value of the index number equal to 100 in 2008.
d. Calculate the annual rate of inflation using the percent change in the value of the index number between each year from 2010 through 2015.
You would find it helpful to fill in the table below
e. Is there a year where inflation is negative? What does deflation imply?
f. The international price of oil has declined since 2014. What do you expect the response of consumers would be to such a decline in oil prices?
g. How many baskets of goods and services can \(£ 100\) buy a household in 2010 and in 2014? What has happened to the purchasing power of money during this period? How can households ensure that their purchasing power does not decline?
h. Bank of England sets the target for the annual inflation rate of the Consumer Prices Index at \(2 \%\). Why would the Bank set such an inflation target?
i. Prices of oil and agricultural products decreased during the period 2010-2015. The Office for National Statistics calculates core inflation, which excludes energy and food prices. Complete the table below to calculate core inflation for the same period. How does core inflation compare to the CPI?
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