Wednesday, October 18, 2006

Inflation or Deflation for Consumers?

This morning the Bureau of Labor Statistics released the most important point inflation number: the Consumer Price Index (CPI). Falling energy prices brought the overall “headline” CPI down about one half of 1% for the month of September. However the core CPI, which is watched more closely by the Federal Reserve, actually increased by 2/10 of 1% during September.

The core CPI strips out food and energy prices out of an inflation number. (See yesterday’s MacroMind.) The core CPI didn't plunge at all, but actually increased, spurred on by increases in housing and clothing. In fact if you look at the core CPI rate of inflation over the past year it's coming in just under 3%, which is the highest increase in ten years, and a rate of change which tends to make the Federal Reserve feel uncomfortable. The Fed (actually the Federal Open Market Committee) has a meeting next week, and they are widely expected to hold short term interest rates steady.

Meanwhile, in Southern California local consumer prices rose 0.5%, and 3.4% in the past year as reported in the Orange County Register. We’re running way over the national average here, as we do in most things. If your boss didn’t give you at least a 3.4% raise in the past year, your purchasing power has fallen, and your real income is down.

Midterm Questions:
Let me share with you a few questions concerning the consumer price index and inflation that you might see on your midterm.
-Why is inflation undesirable?
-According to the Bureau of Labor Statistics CPI survey which category of spending represents the largest part of consumer spending?
-Price indices like the CPI are calculated using a base year. What is the value of a price index during the base year?

Extra Credit:
Go to the Bureau of Labour statistics inflation calculator. Find how much buying power a dollar would have in the year that you were born as compared to 2006? Explain. If you are the first student to send me an e-mail with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions, so if you have already earned extra credit, please no e-mails. You can also post directly to the blog.

Today instead of typing the blog I'm using a voice recognition program. I suppose I shouldn't tell you the name of the software program, but it works pretty well. The accuracy rate is far higher than voice recognition programs that I've tried to use in the past. Maybe soon we'll finally be freed from the drudgery of typing, which will be really neat. Technology marches on. Whatever happened to secretaries?

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