Saturday, January 21, 2017

How To Interpret Differing Perspectives On Changes In The Price Level

The Bureau of Labor Statistics reported Thursday that the Consumer Price Index for all items rose by 2.1 percent in December from its level in the same month of the previous year. At the same time, the BLS and other agencies reported several other perspectives on rising US price levels. 

The change in the CPI is best understood as a change in the cost of living. As explained here, an increase in the cost of living measures the difficulty of maintaining one's standard of living, based on no change in income. The cost of living is the natural focus of individual consumers.

Other data attempt to measure the rate of inflation. Inflation means a change in the value of the unit of account, the US dollar, in this case. A pure increase in the unit of account would raise all wages and prices by the same amount, resulting in no change in the cost of living. Inflation is the natural focus of monetary policy.  . . .

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