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Inaccuracies Of The Consumer Price Index(CPI) - Online Essay

Inaccuracies Of The Consumer Price Index(CPI)

Inaccuracies of the Consumer Price Index(CPI)
The Consumer Price Index is a measure of the prices of a fixed market
basket of some 300 consumer goods and services purchased by a "typical" urban
consumer. The 1982-1984 period serves as the base period so analysts can compare
other year's changes with this base period. The composition of the market
basket is fixed in the base period and is assumed not to change from one period
to another. The reason for the assumption is because the CPI measures the
costliness of a constant standard of living. Critics claim that the CPI is
inaccurate because it overstates the increases in the cost of living. For this
reason, the CPI has been said to be ...

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and therefore the prices should be
higher. The CPI, however, assumes that the increases in prices is a result of
inflation rather than quality improvements which is false. Here also, the CPI
overstates the rate of inflation.
Many consumers do not mind the overcompensation of the CPI because in
most cases it means more money in their pockets, but there are some consequences.
This may cause an ongoing inflation trend. The reason why the government does
not restrict it is because they are worried about getting re-elected. Even if
the President does call for a revision of the CPI, Congress would defeat it to
keep their positions.
Another consequence of the overstated CPI involves the adjustment of tax
brackets. Their intent of indexing is to prevent inflation to cause people to be
placed into a higher tax bracket. For example, if your income increases by 10%,
that may put you in a higher level tax bracket, but if product prices have also
increased by 10%, your real income ...

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Inaccuracies Of The Consumer Price Index(CPI). (2008, February 28). Retrieved November 28, 2024, from http://www.essayworld.com/essays/Inaccuracies-Of-Consumer-Price-Index-CPI/79743

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PAPER DETAILS

Added: 2/28/2008 10:10:45 AM
Category: Economics
Type: Premium Paper
Words: 452
Pages: 2

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