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Consumer Price Index (CPI) Is
The Consumer Price Index is a comprehensive measure used to estimate price changes in a basket of goods and services that represents consumption expenditure in an economy called the consumer price index. The Consumer Price Index represents price changes as experienced by Canadian consumers. It measures price changes by comparing, over time, the cost of a fixed basket of goods and services.Why is the Consumer Price Index Important?
The CPI is one of the most commonly used tools to measure inflation and deflation. Inflation is an important indicator of economic health. Governments and central banks use the CPI and other indices to make economic decisions. Key among them is whether to raise or lower interest rates. Higher interest rates make it more expensive to borrow money and are designed to suppress consumer spending and, in turn, inflation. Lower interest rates work the other way around and are designed to encourage consumer spending, to keep inflation within a country’s target.
The function of the Consumer Price Index is
The CPI can be used to identify periods of inflation and deflation. A significant increase in the CPI over a short period of time may indicate a period of inflation, and a significant decrease in the ICP over a short period of time may indicate a period of deflation. However, because the CPI includes volatile food and oil prices, it may not be a reliable measure of periods of inflation and deflation. For more accurate detection, the core CPI (CPILFESL) is often used. When using the CPI, please note that it does not apply to all consumers and should not be used to determine the relative cost of living. In addition, the CPI is a statistical measure that is susceptible to sampling error because it is based on a sample of prices rather than a complete average.Categories of Goods and Services that Can Be Measured
Barang dan jasa dalam keranjang CPI dibagi menjadi 8 komponen utama: Makanan; Tempat berlindung; Operasi rumah tangga, perabot dan peralatan; Pakaian dan alas kaki; Angkutan; Kesehatan dan perawatan pribadi; Rekreasi, pendidikan dan membaca, dan Minuman beralkohol, produk tembakau dan ganja rekreasi.Forex Indicators: Definition, Functions and Types of Indicators
How is the Consumer Price Index (CPI) Used?
The CPI is widely used by financial market participants to measure inflation and by the Federal Reserve to calibrate its monetary policy. Businesses and consumers also use the CPI to make informed economic decisions. Because the CPI measures changes in consumer purchasing power, it is often a key factor in payroll negotiations. The CPI and its components are also used as a deflator for other economic indicators, including retail sales and hourly/weekly earnings, to separate underlying changes from those that reflect price changes. Cost-of-living adjustments (COLAs) based on the CPI affect federal payments to the approximately 70 million Americans who receive Social Security and Supplemental Security Income (SSI) benefits. They also apply to federal pension payments, school lunch subsidies, and income tax brackets.How is CPI Calculated?
The Bureau of Labor Statistics samples 94,000 prices each month to calculate the CPI, weighting the index for each product or service in proportion to its share of recent consumer spending to calculate the overall price change. The calculation also takes into account substitution effects as consumers shift spending away from products that have risen in relative price. The CPI also adjusts for changes in product quality and features. Figures are provided with and without seasonal adjustments.Price data
The most fundamental data in the CPI is prices. CPI price data are collected through two surveys: one survey collects prices of commodities and services and the other collects rents.Survey of commodities and services
The CPI survey collects approximately 94,000 prices per month to calculate the commodity and services indices. Approximately two-thirds of the price collection in the CPI is conducted by personal visits by CPI data collectors to physical stores. The remaining data are collected by telephone or on outlet websites. In some cases, these data are supplemented by data provided by other sources. The outlets where prices are collected are selected based on data from the CE survey. These outlets can be physical stores or websites (e-commerce); currently, approximately 8 percent of CPI quotes are collected from outlet websites. Several secondary sources are also used in constructing the CPI sample. For example, data from the U.S. Department of Transportation database is used to construct the sample of fares in the airline fare index.Housing survey
The CPI survey collects about 8,000 rental unit quotes each month to calculate the index for the housing component. It uses rental price quotes and homeowner equivalent rents (an estimate of the implicit rent that owner-occupiers would pay if they rented their homes) to calculate estimates of price changes. Because rents change relatively infrequently, the CPI program collects rent data from each sample unit every 6 months. Collecting rent data less frequently allows for a much larger sample. The CPI divides each area's rent sample into six subsamples called panels. Panel 1 rents are collected in January and July; panel 2, in February and August, etc. Rent is collected by personal visits or by telephone.CPI Limitations
The CPI is not an indicator of the price level. The CPI measures the rate of change in prices in the economy, but not the price level. If the bread price index is 140 and the egg price index is 180, it does not mean that eggs are more expensive than bread. It simply means that the price of eggs has increased more than the price of bread over a given point in time.Coverage
For practical reasons, the CPI measures changes in the prices of goods in the metropolitan areas of Australia's eight capital cities (where about two-thirds of Australian households live). It does not measure price changes in regional, rural or remote areas. The CPI also does not take into account differences in spending patterns between individual households. Households are very different and some may spend more on certain goods than others. For example, cars account for almost 3 per cent of the CPI basket, but not every household owns a car.Quality changes
The CPI is intended to account only for pure price changes. This means that the CPI must ignore price changes that result from variations in the quality of goods. The quality of goods in the basket can vary and new products can be introduced. For example, a bag of pasta can become smaller, or the quality of a mobile phone can improve if its camera is improved. The ABS attempts to eliminate price changes that result from changes in the quality or mix of goods that households buy. Continuing the previous example, the ABS would calculate the price of pasta assuming its weight remains the same, and compare it to the price in the previous quarter. Calculating the increase in the price of a mobile phone due to a better camera is more difficult, because there is often limited information about how much the price of a mobile phone has changed because of the better camera. In this case, the ABS would need to estimate the price impact of the improved camera and adjust the price of the mobile phone accordingly. Because the adjustment is only an estimate, it can result in under- or overestimating the pure price change. Services are particularly difficult to adjust for quality because changes often occur slowly and it is difficult to measure how much the service has improved. For example, better x-ray technology in hospitals can detect injuries better, but it is difficult to quantify how much the improvement in detecting injuries is worth. In such cases, it can result in quality being only partially or not accounted for at all. Better x-ray technology in a hospital may be better at detecting injuries, but it is difficult to quantify how much of an improvement in detecting injuries is worth. In that case, it may cause quality to be only partially or not counted at all. Better x-ray technology in a hospital may be better at detecting injuries, but it is difficult to quantify how much of an improvement in detecting injuries is worth. In that case, it may cause quality to be only partially or not counted at all.Substitution Bias
The CPI is affected by ‘substitution bias’. This is because the CPI does not adjust for changes in household spending patterns very often (since identifying such changes for all households is a key task). In reality, households often change the amount they spend on goods. For example, if the price of lamb rises more than the price of beef, households may adapt and buy more beef and less lamb. Not accounting for this type of substitution in spending results in too much weight being given to lamb in the CPI basket and too little weight being given to beef. This inflates (or biases) the CPI compared to an index that takes into account households substituting relatively more expensive goods for relatively cheaper ones.New Products
The CPI does not include new products as soon as they appear on the market. It often takes time for the ABS to include them in the CPI basket. This usually occurs after a product has achieved a high enough market share and is available to a large number of households.Cost of living
The CPI is often used to measure changes in the cost of living, but it is not an ideal indicator for this. While the CPI measures changes in prices, cost of living inflation is the change in household spending required to maintain a given standard of living. The ABS publishes other indices that aim to provide a better indicator of the cost of living. That's all the explanation about the CPI, you can also read other GIC articles to get more knowledge, such as the explanation of the Black Card, only in the GIC Journal. Make sure to download the GIC Mobile Apps on the Google Play Store and the Apple App Store. Don't forget to register for trading at GIC to try to start having digital assets.
