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You were looking for what? (Or, search term questions.) October 26, 2017

Posted by tomflesher in Macro, Teaching.
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Occasionally I mine the search terms for interesting questions. Here are three from the past month:

  • What is an increase in CPI?

CPIWhen a country’s CPI increases, that means that, on average, the cost of living in the country has increased. The Consumer Price Index measures the price of a fixed basket of goods. For example, in the United States, CPI consists largely of housing costs, food and beverages, and transportation. When the price of any good in the basket goes up, it increases total basket expenditure, but the effects of (for example) increasing food costs would be greater than the effects of increasing costs of haircuts (included in the “Other” category). Although the BLS is careful to point out that the CPI is not a cost-of-living index, it functions a lot like one. (The chart was retrieved from the US Department of Labor website.)

The percentage change in CPI, otherwise called the CPI growth rate, is the most common measure of inflation.

  • if the cpi went up why not all the goods prices goes up? [sic]

This question gets the causation backwards. The CPI measures how much prices are changing; you can use the percentage change in CPI to measure how much, on average, prices have gone up, but that says very little about individual goods. For example, the Transportation category includes the price of gasoline. If cell phone bills decreased, but gasoline prices increased, the fact that we (on average) spend more money per year on gasoline than on phone bills (as reflected by the different weights, above) means that the gas price increase will have a greater effect on our overall spending.

CPI reflects those changes. It’s possible for the total cost of the basket of goods used to measure CPI to increase even if some of those goods had steady or even decreasing prices.

  • mastovesion is good or bad

You do you, gentle reader.

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Increases in CPI: Good or bad? January 30, 2012

Posted by tomflesher in Macro, Teaching.
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One of the nice things about WordPress is that I get a nice summary of the search engine terms that led people to my page. Bobby Bonilla is popular, as always – it’s nice to know that people are curious about him – but another common way people end up on my blog is by looking for pros and cons of the Consumer Price Index. One searcher this week asked:

Is an increase in CPI good or bad?

As with all economics, the answer is, “It depends,” but let’s start by asking a refining question: Good or bad for whom?

  • The Government: Good.

An increase in the CPI represents an increasing cost of living, which is related to inflation. Inflation, as measured by an increase in the CPI, means that the government can sign contracts to pay employees or purchase materials in current dollars and then pay them back in inflated dollars; that is, if I sign a contract today, January 30, 2012, to pay you $100 on January 30, 2013, then the $100 I have now is worth more than the $100 I’ll pay you back with. (This is one reason for interest payments.) Of course, if everyone expects the inflation, they’ll take that into account when contracting with the government and demand higher payments. A government can, in fact, use large unexpected inflation to cut their costs this way – it’s called an inflation tax, and we’ll talk about it a little later on – but it’s not  a strategy that works well or often.

  • Businesses: Good.

Businesses can take a beating if they’re contracting with governments, but consider wage contracts – when I worked at a factory, pay rates were set by position in January, so my only hope of getting a raise was to move to a higher position. If CPI rose over the course of the year, which it almost always did, I took what was effectively a pay cut until the next round of  cost-of-living adjustments in January. That means that the business could negotiate contracts throughout the year for supplies and sales, but its real wage expenses actually fell.

  • Consumers: Bad (mostly).

And who takes the brunt of the drop in real wages? Households, or consumers. Since I lack the power to demand my wages rise throughout the course of the year, then my wages on January 1 are going to buy fewer goods than my wages on December 31, even though they’re nominally the same amount of money.

On the other hand, a small, predictable amount of inflation allows for a few things to happen. If it’s small, it means that prices more or less stay the same. (A large inflation rate would make it impossible for me to keep the same wage from January 1 to December 31 without built-in monthly or quarterly raises, for example.) If it’s predictable, we avoid a couple of ugly problems like the inflation tax or surprises when repaying loans. If it’s inflation, rather than deflation, people and businesses have a smaller incentive to hold on to their money to wait for prices to drop, so there’s an argument, weak though it is, to be made that inflation encourages spending.

All told, an increase in CPI means that a household has to spend more dollars to maintain the same standard of living; that’s mostly bad for the households, but it can be good for businesses and the government.