5.15 The Consumer Price Index
How do we know how much inflation is affecting us? The answer is by how much the price of goods is going up. If a loaf of bread that cost $2.00 last year costs $3.00 this year that suggests that prices are going up. We can turn that information into an index by dividing this years cost for bread by last years cost of bread. We can multiply the quotient by 100 to get a percent. That is the consumer price index (CPI) for a loaf of bread. If the cost this year is the same as last year the quotient percent will equal 100. If it's more expensive this year the quotient will be more than 100. If bread went from $2.00 to $300 the CPI for bread would be:
CPI = This years Cost of Bread / last years cost of bread * 100 = $3.00/$2.00 * 100 = 150%
To get a better idea if our costs are going up we have to look at more items than just bread. We could make a list of what we buy and multiply the costs by how many of each we buy. For example if we bought 100 loaves of bread each year and 50 apples we need to multiply 100 * the cost of bread and add that to the cost of 50 apples. The problem with doing that is if we buy more this year than last our index will go up even though the cost of the items did not go up. We can compensate for that by multiplying by weighting factors. The danger of weighting factors is the government can alter them to make the CPI appear lower than it really is. The government may not want people to realize how much costs are going up. People might vote for a different party in the next election.
I am writing this web page on December 12, 2021. The U.S. government tells us that the Consumer Price Index has gone up by 7%. from last year. That doesn't sound that bad even though it's almost the highest it has been in the last 40 years. Is that really how much inflation has gone up? Tucker Carlson asks that question in the video below. He mentions Bernie Madoff, Bernie Madoff defrauded investors out of billions of dollars. The video shows politicians saying that the inflation is transitory. They are trying to convince everyone that inflation will be over soon so they won't be voted out of office. There is no reason to believe that inflation will be over soon because our government's actions are making inflation worse. Why that is will be explained in a future lesson.
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