The CPI is perhaps the best way we have to gauge the amount
of inflation in the economy. Inflation directly or indirectly affects nearly
every financial decision, from consumer choices to lending rates,
from asset allocation to stock prices.
By accurately measuring the amount of inflation, people, business, and the
government are better able to make future financial decisions. For more
information about the Bureau of Labor Statistics inflation measures, visit
Causes of Inflation
Primary Causes
Increase in Public Spending
Deficit Financing of Government Spending
Increased Velocity of Circulation
Population Growth
Hoarding
Genuine Shortage
Exports
Trade Unions
Tax Reduction
The imposition of Indirect Taxes
Price-rise in the International Markets
The Consumer Price Index expresses the change in the current prices of the market
basket in terms of the prices during the same period in the previous year. The CPI is
usually computed monthly or quarterly. It is based on the expenditure pattern of
almost all urban residents and includes people of all ages
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The CPI measures costs in these areas, according to the BLS:
Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full
service meals, snacks)
Housing (rent of primary residence, owners' equivalent rent, fuel oil,
bedroom furniture)
Clothes (men's shirts and sweaters, women's dresses, jewelry)
Transportation (new vehicles, airline fares, gasoline, motor vehicle
insurance)
Medical Care (prescription drugs and medical supplies, physicians' services,
eyeglasses and eye care, hospital services)
Recreation (televisions, toys, pets and pet products, sports equipment,
admissions)
Education and Communication (college tuition, postage, telephone services,
computer software and accessories)
Other Goods and Services (tobacco and smoking products, haircuts and
other personal services, funeral expenses)
Also included within the major groups listed above are various government-
charged user fees, such as water and sewerage charges, auto registration fees, and
vehicle tolls. Also, the CPI includes sales and excise taxes associated with
purchases.
However, the CPI excludes taxes—such as income and Social Security taxes—
which are not directly associated with the purchase of consumer goods and
services.
There's one more item off the list. The CPI does not include investment vehicles,
such as stocks, bonds, real estate, and life insurance.
The middle-class squeeze refers to negative trends in the standard of living and
other conditions of the middle class of the population. Increases in wages fail to keep
up with inflation for middle-income earners, leading to a relative decline in real
wages, while at the same time, the phenomenon fails to have a similar effect on the
top wage earners. People belonging to the middle class find that inflation
in consumer goods and the housing market prevent them from maintaining a
middle-class lifestyle, undermining aspirations of upward mobility. In the United
States, middle-class income is declining while many goods and services are
increasing in price, such as education, housing, child care, and healthcare. [1]
Impact on poor and middle class people:
The major consequence of food inflation is the erosion of real income of the people resulting
from the general
increase in prices. The burden of income loss differs across different income groups.
Undoubtedly the household
groups who are employed in the formal sector and whose salaries/wages are fixed in nominal
terms and are re-
fixed periodically are the worst sufferers. The same is true for those employees in the
informal sector who have
income fixed in nominal terms. In Bangladesh, a major concern, however, is the inflation-
induced loss of real
income of the poor. Rise in inflation need to be compensated by the increase in wage. The
Bangladesh Bank
analysis shows that the daily agricultural wage rate in real terms over the period from January
2005 to September
2007 has not declined, rather it has shown a slightly increasing trend. This shows that
agricultural labourers, who
constitute the largest poor group in the country, usually turn out successful in maintaining the
level of their daily
real wage at a certain level.
Table 4.1 reports the estimated yearly average CPI food inflation for day labourers and fixed
income households in rural and urban areas for the period 2008-2011. It is observed that
different rural households faced low food inflation in 2008-09 and 2009-10 due to a sharp
decline of rice prices from the level of 2007-08, while the average food inflation rates
remained almost the same ranging between 14 and 16 percent in other years. The inflationary
trends are largely consistent with rice price trends as shown in Section 3.2. Interestingly, it
appears that while poorer households were in most advantageous position during the lowest
level of inflation (2008-09 and 2009-10), they became more vulnerable with gradual
spiralling of inflation. Overall food inflation in rural areas was found to be lower than urban
areas, as opposed to the recent findings of the BBS. Although the share of rice in food basket
does not differ significantly between rural and urban areas, the difference arises due to higher
share of medium quality rice in food basket of urban people
