Measuring Inflation Using CPI

Introduction: Inflation is the rate at which the general level of prices for goods and services in an economy is increasing over time. It’s often measured using the Consumer Price Index (CPI), which tracks the percentage change in the cost of a representative basket of goods and services purchased by a typical household over time.

Case Study: The Republic of Inflaonia 

The Republic of Inflaonia has been experiencing high inflation from 2017 to 2022 due to rapid growth in the money supply caused by excessive government borrowing and spending. This has led to an erosion of purchasing power for consumers, higher production costs for businesses, and increased uncertainty for investors.

While some stakeholders, such as borrowers, have benefited from the reduced value of their debt, others, like savers and those on fixed incomes, have been negatively impacted by the high inflation. The central bank of Inflaonia has struggled to maintain price stability, and as a result, the economy has experienced uneven growth and increased income inequality.

Data Table: Prices of Everyday Goods in Inflaonia (2017-2022)

Activity Instructions:

  1. Calculate the inflation rate between 2017 and 2018, 2021 and 2022, and 2017 to 2022 for each category.
  2. Calculate the unweighted CPI for each year from 2017 to 2022.
  3. Now, use the following weightings for each category to calculate the weighted CPI for each year:
    • Food: 40%
    • Housing: 30%
    • Transportation: 15%
    • Healthcare: 10%
    • Entertainment: 5%
  4. Compare the unweighted and weighted CPI values for each year. Comment on the differences and discuss why weighting categories is important when calculating the CPI.
  5. Reflect on the impact of high inflation on different stakeholders in Inflaonia’s economy and discuss potential policy measures that the central bank and the government could implement to address the issue.