3.7 Measurements of inflation
Consumer Price Index (CPI) calculations are restricted to the consumers' purchasing behavior only in the context of price increases of goods and services from one period of time to another. CPI does not take into account the producer price index, or PPI. The PPI is a measure of the average change over time in the selling prices received by domestic producers for their output. An upside to having so many indices to measure inflation is that each one (i.e., GDP deflator GDP price index, CPI, and PPI) serves as a measure of the same inflationary tendencies but measures it in a slightly different way.
3.7.1 Consumer price index
Activity
Khan Academy: "Actual CPI-U Basket of Goods"
- Watch this lecture, which discusses an actual CPI-U basket of goods. As you prepare to cover various measures of inflation, keep in mind that the CPI captures the changes in prices of items consumers typically purchase from retail outlets. Some measures are broader in scope than others.
3.7.2 Producer price index
Activity
Wikipedia: "Producer Price Index"
- Read this article, which covers several aspects of the index, including its calculations and emphasis on the prices that producers typically pay for inputs like raw resources or intermediate goods from vendors and wholesale outlets. Keep in mind that some measures of inflation are broader than others.
3.7.3 The GDP deflator
Activity
Wikipedia: "GDP Deflator"
- Read this article, which covers several aspects of the GDP deflator, including its calculations. As the deflator covers the components of GDP, it is the broadest among several measures of inflation. Comparisons of the deflator against the PPI and the CPI can reveal information about the sources of inflation.
