CPI and Inflation

The Consumer Price Index is a market basket of all goods and services in the US economy. The base year is 1983. It is important to note that some items in the CPI measurement such as food and beverage can go up and other items such as fuel can go down; yet CPI can increase. For example we might have deflation in gasoline, however, cereal, beverages, and housing could increase at a faster level. In this example CPI would increase over the measured period and inflation would rise. The key take away is that some goods increase and some goods decrease in price, but every year overall prices rise 2 to 3 percent. Finally, some goods always decrease in price over time. Some examples are laptops and flat screen TVs. Also CPI is not always a good measure of price level. For example, apartment rents will always be higher in New York, New York than they will be in Memphis, TN. Many people will argue that workers are paid more in New York City than somewhere like Memphis, TN to compensate for higher price levels. However, I would guess that the average worker would have a higher standard of living in Tennessee than New York. We will speak more on wages in upcoming posts.