Consumer price indexand Inflation

Introduction

Consumer price index (CPI)

Inflation rate

Content

1. Introduction

• Inflation is defined as a sustained growth of the average prices of goods and services (it is also defined as a sustained decline in the value of money and a decrease in the purchasing power).

• Deflation is defined as a sustained reduction of the average prices of goods and services.

• Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services.

• The observed variation in the price level is measured by a

price index, either by the consumer price index (CPI) or the

Deflator (implicit price index of GDP: IPIGDP)

• The inflation rate is simply the rate of change (rate of

variation) in percentage of the selected index.

• Core CPI inflation, the year-over-year rate of change of the

consumer price index excluding food, energy, and the effects

of changes in indirect taxes, as the operational guide for

monetary policy.

P P

Temps Temps

1,00

1,05

1,00

1,05

1,10 1,10

Sustained growth of the general price

levelOne time increase in the

price level

Inflation and price level

• As well as unemployment, inflation is an economic and social wound for any country in the world, especially when it is not anticipated by economic policymakers, or controlled by the monetary authorities

• Currently the inflation rate is about 2% in most industrialized countries, a low, stable and therefore predictable value.

2. consumer price index (CPI)

• The consumer price index measures the changes in the average price level of a fixed basket of goods and services that consumers bought during a given period. The choice of goods and services in the basket is based on the consumption patterns of Canadian households in 2005, but it is updated periodically.

• The media generally report the CPI inflation but for macroeconomists inflation measured by the IPIGDP is equally important.

How do we calculate this price index?

The CPI and the basket of goods and services

• The Canadian CPI is calculated from a basket with a little more than 600 goods and services, divided into 8 main components such as, food, shelter, clothing, transportation, etc. ..

• The base year is 2002

• This basket price is calculated monthly

IPC dans les provinces canadiennes (2012)

CPI calculations

• Choose a representative basket of goods and services

• Find the prices of these goods

• Compute the cost of the basket

• Select a base year

• Compute the CPI

Cost of the basket of goods for the current year t at the current prices100

Cost of the basket o base pricf goods for e the current year t at the

100

st

t b

b b

CPI

P Q

P Q

CPI calculations

Année Prix A Prix B Coût du panier 1 IPC2 Taux d’inflation

2003

2004

2005

1$ 2$

2$ 3$

3$ 4$

8$

14$

20$

100

175

250

75 %

43 %

1 : le panier est défini comme 4 unités de A et 2 unités de B2 : l ’année de base est 2003

IPC Canadien: Variation sur 12 mois des composantes principales (novembre et décembre 2012)

IPC dans les provinces canadiennes (2012)

3. Le Taux d’Inflation

((111,9-109,5)/109,5)*100 = 2,2 %

Taux d’inflation canadien (1980M1-2009M7)

2001M053,9 %

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1980 1985 1990 1995 2000 2005

Taux d'inflation selon IPC (2002=100)

Pou

rcen

tage

(%) P

ourcentage (%)

1981M712,9 %

1984M13,4 %

1991M16,9 %

2003M24,7 %

2009M7 - 0,9%

Taux d’inflation

-6

-4

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

12

14

82 84 86 88 90 92 94 96 98 00 02 04 06 08

Taux annuel de croissance du PIB réelTaux d'inflation selon IPC

L’inflation mesurée par l ’IPC et le cycle économique,

1980-2009

18

How do we use the CPI in order to compare values How do we use the CPI in order to compare values

in dollars through time?in dollars through time?

• A sum of money M t in period t has the same purchasing power as Zt-n $ from the t-n period, calculations follow this formula:

• Zt-n = (IPCt-n / IPC t) x M t

• A sum of money Zt-n from the t-n period has the same purchasing power as M t $ in period t, calculations follow this formula:

• M t = (IPCt / IPC t-n) x Zt-n

19

Examples

$ 1,000 in 2003 had the same purchasing power as $ 302.53 in 1976, according to the CPI table.

(31,1 / 102,8) x 1 000$ = 302,53$

$ 2,000 in 1974 had the same purchasing power as $ 465.65 7 in 2001, according to the CPI table (97,8 / 26,2) x 2 000$ = 7 465,65$

20

What is the real rate of What is the real rate of

interest?interest?

• The interest rate must be adjusted for inflation

• r = i – π ,

• i = r + π

• r: the real interest rate

• i: the nominal interest rate

• π e: the expected rate of inflation

• π : the observed rate of inflation

21

Deux exemples

Une banque privée désire faire 7% (r) de rendement réel sur les prêts qu’elle consent. On anticipe un taux d’inflation de 3% () pour l’année qui vient.La banque demande un taux nominal de 10% (i) à ses clients. (7% + 3% = 10%)

M. Tremblay a obtenu 1% (r) de rendement réel sur un CPG dont l’intérêt nominal était de 2,5% (i), puisque que l’inflation annuelle fut de 1,5% (). (2,5% - 1,5% = 1%)

In other words, in the In other words, in the case of deposits ...case of deposits ...

• The nominal interest rate is the rate posted by banks. It measures the monetary increase of the deposit.

• The real interest rate measures the increase in the purchasing power of the amount deposited.

22

23

Qu’est-ce que l’indexation des Qu’est-ce que l’indexation des

revenus ?revenus ?

• Un ajustement du revenu nominal (Rn) qui permet au revenu réel (Rr) d’augmenter ou de demeurer stable.

• On peut donc dire qu’un revenu est indexé si le pouvoir d’achat du revenu se maintient ou augmente.

24

Example

Income increased from $ 56,000 to $ 57,000 in a year, while the CPI increased from 145.6 to 149.3 during the same period. Has the income been indexed?

25

Quels sont les problèmes Quels sont les problèmes occasionnés par trop occasionnés par trop d’inflation ?d’inflation ?

• Uncertainty about the future • May discourage savings • Insecure investors • Arbitrary redistribution of income