CPI Background Paper
Please address the following questions in your 5-6 page, double spaced, 11-point font CPI report. Please use formal writing and citation in this report. I don’t care about which style of citation that you use, but please be consistent.
Background of CPI
Give a brief history of the CPI. When was it created and why? Who constructs the CPI and how often is the data released? Please provide a time series chart (1947-present) of annual U.S. inflation (‘Percentage Change from a Year Ago’) of the CPI for All Urban Consumers: All Items, using data from FRED (Federal Reserve Research division). Based on your chart, what is the typical annual rate of inflation for the U.S.?
Framework of the CPI
What group of consumers does the CPI most accurately represent? What is a ‘market basket’ (in general terms)? How is the market basket determined? In other words, how is it decided which goods and services are included in the basket? (Please give detailed information about this)
Groups and weights of the CPI
What are the major groups of goods and services in the CPI? What type of items are NOT included in the CPI? What are the weights for the different groups or categories of goods in the CPI. Why do they have different weights?
Explain the difference between headline and core inflation. Which one do economists and/or policy makers care more about? Why?
Collecting the data
How are the prices of goods and services in the market basket recorded? In other words, who is collecting the data and how do they collect it? How does the BLS decide where to collect the data?
If the BLS is recording price data on ground beef, for example, do they pick any type of ground beef or are they looking for a specific type?
What are some of the issues with the CPI (On a Principles of Macroeconomics level)? Explain what the substitution, increase in quality, and new product bias are. Do economists believe the CPI understates or overstates the true cost of living? Explain your answer