South-Western College Publishing - Economics  
Consumer Prices Rise More Than Expected
Topic Output, Income, and the Price Level
Key Words Consumer Price Index and Inflation
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Reference ID: A159622259

News Story There are two measures of inflation commonly reported in the news. One, the overall rate of inflation is a measure of the average rise in prices for all goods in the economy. The consumer price index measures this rise based on a specific set of goods and services purchased by consumers. It is often used as a cost of living index. For example, some pension plans adjust their benefits based on the cost of living.

The second measurežthe one most often followed by the Federal Reserve in making monetary policy decisionsžis the rate of core inflation. The core rate is a measure of price changes that excludes items with a volatile nature. By eliminating products that can have a temporary price shock or rapid movement, the false measure of inflation is removed.

The measure of core inflation relied on by the Fed eliminates energy and food prices from the inflation measure. With the core inflation rate increasing by 0.3 percent in January it contributed to a 2.7 percent annual increase from a year earlier. The Fed's benchmark range for acceptable inflation is from 1 to 2 percent.

So what will the Fed do about inflation when the Open Market Committee meets in March? "Inflation is still sticky, and higher than the Fed wants it to be," said Mickey D. Levy, chief economist with Bank of America. "And as long as it stays above 2 percent, the Fed is going to continue to express concern about it."

Questions
Discussion Questions:
1. Visit http://www.bls.gov/cpi/cpifaq.htm and answer the question: Whose buying habits does the CPI reflect?
2. Discuss the difference between the CPI and the core CPI as a measure of inflation.
Multiple Choice/True False Questions:
1. The core rate of inflation is measured by excluding products with stable price characteristics.
  1. True
  2. False
2. The Fed does not worry about inflation as long as it does not exceed 4 percent on an annual basis. .
  1. True
  2. False
Source Jeremy Peters, "Consumer Price Gauges Rise More Than Expected," The New York Times Online, February 22, 2007.
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