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P r i c e I n d ic e s: P a r t 3

P r i c e I n d ic e s: P a r t 3. MEASUREMENT ECONOMICS ECON 4700. Today…. Inflation Rates of Change Price Indexes The CPI Problems with inflation measures Prices Division. December. 1918. 0.54. December. 1921. 3.90. December. 1922. 163.50. August. 1923. 69, 000.00.

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P r i c e I n d ic e s: P a r t 3

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  1. Price Indices: Part 3 MEASUREMENT ECONOMICS ECON 4700

  2. Today… • Inflation • Rates of Change • Price Indexes • The CPI • Problems with inflation measures • Prices Division

  3. December 1918 0.54 December 1921 3.90 December 1922 163.50 August 1923 69, 000.00 October 1923 1, 743, 000, 000.00 November 1923 201, 000, 000, 000.00 Great inflations of the 20th Century Price (in Dm) of a bread loaf in Berlin, 1918 to 1923

  4. Germany’s Inflation Rate, per week in 1922

  5. Price level and money supply index (1913 = 1) Price level Money supply 1920 1921 1922 1923 1924 Money supply and prices: German 1920-1924 10 000 000 000 000 Inflation rate in 1923: 1,000,000% 1 000 000 000 000 100 000 000 000 10 000 000 000 1 000 000 000 100 000 000 10 000 000 1 000 000 100 000 10 000 1000 100 10 1

  6. 1994 Other Great Inflations (1994) • Hungary, after WWII • 1,000,000,000,000,000,000,000,000,000,000 % !!! • Kazakhstan: 1 875% • Ukraine: 4 962% • Belarus: 2 221% • Azerbaijan: 1 663%

  7. History of inflation in Canada World War I Oil Crisis I Post War Boom Oil Crisis II Korean War World War II Sustained Growth Tobacco Tax GST Depression Depression

  8. Calculating the inflation rate Inflation rates are calculated from price indexes

  9. Common theme for these price indexes: Purchasing power or value of money

  10. Purchasing power of Canadian dollar since 1914 1914 = 1 $ Source: CANSIM, table 326-0002 $ 1 / CPI

  11. Example of indexes... • TSX 300 • Price Deflators of the National Income Aggregates: • GDP, C, I, G, NX • PPPs of currencies • Productivity

  12. (CPI.Jan 2006 – CPIDec.2005) X 100 CPIDec.2005 (128.8 – 128.1) = X 100 = 122.3 Canada, January 2006... Month to month change 0.5%

  13. Today (Jan. 1992 to Jan. 2006) Month-to-month change

  14. Canada, January 2006... 12-month change (CPIJan.2006 - CPIJan. 2005) X 100 CPIJan.2005 2.8% (128.8 – 125.3) X 100 = = 125.3

  15. Today (Jan. 1992 to Jan. 2006) 12 month change

  16. Annual inflation rates, Canada vs. developing countries, 2007 Source: www.imf.org 1.9

  17. Annual inflation rates, Canada vs. industrialized countries, 2007 Source: www.imf.org 1.9

  18. What is the consumer price index? The Consumer Price Index (CPI) is an indicator of the changes in consumer prices that are experienced by a target population. It measures price changes by comparing, through time, the cost of a fixed basketof commodities.

  19. Target population • Since 1995, the CPI has measured the price changes experienced by Canadian families and individuals living in urban and rural private households. • Persons living full time in collective households are excluded from the Survey of Household Spending.

  20. What time period are we going to compare to? • The CPI compares the price changes of commodities to a fixed period in time that is called the time base or base period. • The CPI is using a period of one year as its reference point. • It is currently published using 2002 as the base year. This is indicated using the notation (2002 = 100).

  21. Fixed Basket • Basket is fixed in terms of underlying quantities at the expenditure class • Basket is fixed in terms of quality • Fixed weights are reviewed frequently, usually 4 years.

  22. CPI weights The weights reflect the relative expenditures of the CPI population group as a whole and not of any particular type and size of household. As such, the weights are said to reflect expenditures of households on average and not the expenditure of an average household.

  23. Alcoholic Beverage & Tobacco Products: 6% Household Operation & Furnishing: 10% CPI Weights - 2001 basket Major Components as Percentage of Total Spending Recreation, Education & Reading: 10% Health & Personal Care: 4% Food: 18% Transportation 17% Shelter: 28% Clothing & Footwear: 7%

  24. Alcoholic Beverage & Tobacco Products: 4 % Household Operation & Furnishing: 11% CPI Weights - 2005 basket Major Components as Percentage of Total Spending Recreation, Education & Reading: 12% Health & Personal Care: 5% Food: 16% Transportation 19% Shelter: 28% Clothing & Footwear: 5%

  25. 8 Major component Major component Intermediate class Intermediate class Intermediate class Intermediate class 169 Basic Class Basic Class Basic Class Basic Class Price ratio Price ratio Price ratio Price ratio Price ratio Price ratio Price ratio Price in June Price in June Price in June Price in June Price in July Price in July Price in July Price in July CPI: Classification All-items Food Shelter Household operations and furnishings Transportation Clothing and footwear Health and personal care Recreation, education, and reading Tobacco products and alcoholic beverages Price ratio

  26. Commodity Classification (Cont’d) • At the bottom level of the structure there are 169 basic classes. • Basic classes are groupings of commodities that are considered to be similar and homogeneous in terms of their price movement.

  27. Commodity Classification (Cont’d) The classification is the framework around which much of the practical work relating to the weights, the price collection, the production of indexes and the analysis and presentation of information is organized. The 169 basic classes can also be regrouped to form special aggregates.

  28. Annual inflation rate, principal components Inflation rate, Jan.06/Jan.05 Inflation rate, Jan.06/Dec.05

  29. Contents of the basket • In theory, all goods and services purchased by consumers belong in the CPI basket. • Two restrictions apply: • The price of the product must be associated with a specific quantity and quality of that product • The expenditure on the product must be sufficiently important to appear as a weight.

  30. Contents of the basket • Some goods and services are excluded from the basket: • Public goods and services • Life and disability insurance premiums • Used goods • Interest paid on consumer loans • Charitable donations • Lotteries and games of chance • Income taxes

  31. How often are we going to collect prices? The CPI is published every month but the frequency of price collection depends on the nature of the commodity: • Commodities that are subject to frequent price changes are priced monthly • Commodities characterized by less-frequent price changes are collected at intervals longer than one month. In these cases, the last recorded price is carried over until the next price collection. • Seasonal commodities are only available through part of the year. They are priced when available but their price movement is imputed between price surveys.

  32. Consumer Price Index Purpose and Structure

  33. How is the CPI used? • A macroeconomic indicator of inflation • To track the purchasing power of money. • To deflate money values and obtain constant dollar figures. • To index, escalate or adjust money values (i.e. maintaining dollar values.)

  34. % of workers with COLA’s % CPI % COLA CPI COLA

  35. The CPI and the Bank of Canada % Total CPI Target range Target midpoint Core CPI

  36. The CPI and Interest Rates Source: Cansim, 326-0001, B14020 % % Prime business rate CPI

  37. Other Products produced by the CPI section • All-items CPI for Canada seasonally adjusted • Spatial or inter-city indexes for 11 cities • Average retail prices for Canada (59 goods mostly food, some household products and toiletries, and cigarettes) • Average retail prices for gasoline and fuel oil for 16 cities

  38. Main sources of published information on the CPI • The Daily (Statistics Canada daily bulletin) • Monthly publication: The consumer price index (cat. No.62-001-XPB) • Infomat - A weekly Review (cat. No. 11-002-XPF or XPE) • Reference documentation: • Your Guide to the Consumer Price Index (cat. no. 62-557-XPB) • The consumer price index reference paper. Update based on 1992 expenditures (cat. no. 62-553 Occasional) • Electronic databank: CANSIM • Internet site: www.statcan.ca

  39. å Pt Qb å PbQb It/b = Pt ´ å Pb PbQb å Pb Qb å Pt It / b = ´ Pb The Practical Aspects of Compiling Index Numbers It / b = One last formula: • The practical index: wi

  40. Pnt I t / b P1t P2t = wn w1 w2 + Pnb P1b P2b pbi qbi = W + bi p q p q p q + + . . . b 1 b 1 b 2 b 2 bn bn w = bi A weighted average of price relatives +...+ Expenditures for product i Total expenditures

  41. An Example... Two Products… • Breakfast Cereals • Milk

  42. Kellogg's Corn Flakes $3.25 No Brand Corn Flakes $2.75 President's Choice Corn Flakes $3.00 Froot Loops $3.75 Captain Crunch $3.66 Muslix $4.01 Regular Cheerio's $3.25 Honey Nut Cheerio's $3.50 Breakfast Cereal Prices

  43. Probability sampling…

  44. Kellogg's Corn Flakes $3.25 No Brand Corn Flakes $2.75 President's Choice Corn Flakes $3.00 …Or judgmental sampling 3 Stores with market shares: Cereal Fair: 50% Cereal House: 25% House of Cereal: 25% 5 brands of cereal and 75 varieties

  45. å Pn n n å P0 To compile the index...

  46. 1998 1999 2000 Kellogg's Corn Flakes 3.25 4.00 3.75 No Brand Corn Flakes 2.75 2.75 3.50 President's Choice Corn Flakes 3.00 2.75 3.00 Total 9.00 9.50 10.25 Index Number 100 105.6 113.9 9.50/9.00 x 100 = 105.6 9.00/9.00 x 100 = 100 10.25/9.50 x 100 = 113.9 To construct the index... Cereal

  47. More money is available… Let’s build a better index...

  48. Skim Milk $1.25 1 % Milk $1.50 2% Milk $1.60 Homo Milk $1.75 Butter Milk $2.00 Goat’s Milk $2.50 Super Calcium Fortified Milk $5.50 Milk prices

  49. 1998 1999 2000 P P P 0 1 2 Skim 1.25 1.45 1.25 1% 1.50 1.25 1.50 2% 1.60 1.50 1.60 Milk prices trough the years... Milk 4.35 4.20 4.35 Total Index Number 100 96.6 100

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