Welcome to Alanis Business Academy.
I'm Matt Alanis and this is How to Measure the Rate of Inflation.
Inflation represents a sustained increase in the average price of goods and services
in an economy.
This increase in average prices can be problematic as consumers are forced to part with a larger
portion of their income to acquire the same amount goods and services.
The result is a decline in the purchasing power of money, which means that you still
may earn $50,000 a year but the amount of goods and services that you can acquire with
that same $50,000 has decreased.
Now that we know what inflation is we need to understand how to measure it.
Although there are many different measures of inflation, the most widely cited index
is known as the All Items Consumer Price Index for All Urban Consumers for the U.S. City
Average, commonly abbreviated as CPI-U. Often referred to simply as the consumer price index,
the CPI-U measures the average price of goods and services for urban consumers, which represent
approximately 87 percent of the U.S. population.
Since this index deals with urban consumers, it doesn't include the spending patterns of
those living in rural nonmetropolitan areas, farm families, those in the armed forces,
as well as those in institutions like prisons and mental hospitals.
In order to create the CPI-U, data collectors at the Bureau of Labor and Statistics must
determine the prices of a wide range of goods and services commonly referred to as a market
basket of goods.
This market basket of goods is designed to reflect the items that a typical family purchases
in order to achieve some type of minimum standard of living.
In order to determine what should be included in this market basket of goods the Bureau
of Labor and Statistics conducts a consumer expenditure survey.
The most recent survey took place from 2009 to 2010.
A total of 7,000 families were interviewed each quarter during this time period regarding
their spending habits.
Another 7,000 families were asked to keep a detailed diary cataloguing their purchases
for a two week period.
These diaries and quarterly interviewed are then used to determine the importance of more
than 200 items categories used in the CPI-U index structure.
The major categories in the CPI-U include food and beverages, housing, apparel, transportation,
medical care, recreation, education and communication, as well as other goods and services.
Within each of these groups, the Bureau of Labor and Statistics chooses specific items
within selected business establishments frequented by consumers.
Data collectors for the bureau then proceed to call thousands of different establishments
in order to obtain prices for those goods previously identified.
Altogether, a total of 80,000 items are priced per month in order to create the CPI-U.
Once this data is compiled the index can now be generated.
In order to establish a baseline for measurement, the Bureau of Labor and Statistics uses prices
from 1982-1984 as a reference base.
As a result, prices during this 36 month period represent a CPI-U of 100.
Since any change in average prices is measured in reference to this time period, a CPI-U
of 120 means that average prices have risen 20 percent from the reference period.
Now rarely does the media present the consumer price index in this fashion.
Instead, it is commonly presented as a percentage increase or decrease from the prior month,
quarter, and even year.
This helps provide some much needed perspective as to the movement in average prices.
Although the CPI-U is the broadest and most comprehensive indicator of consumer prices,
some prefer to use the All Items less Food and Energy Index.
This index strips out food and energy prices which are relatively volatile compared to
the other items tracked by the index.
This allows users to focus on what is viewed as the primarily drivers of inflation.
This has been How to Measure the Rate of Inflation.
For questions please leave them in the comment box below and I'll do my best to get back
to those in a timely fashion.
If you're interested in learning more about economic indicators, check out the playlist
titled Economic Indicators 101 and also subscribe to Alanis Business Academy for videos on other
business topics.
Lastly, do remember to like and share this video with your friends.
Thanks for watching.