Inflation and the cpi index - Research Paper Example

Indeed, it affects financial planning and budgeting where it considers costs for goods and services, labor, and employee benefits (City Budget Office Web). In addition, inflation affects revenues as changes occur in the prices of taxable goods and services. Price inflation is normally confused with “Price Deflation” which is the percentage decrease in the price of the basket of products over a specific period. However, the question arises as to what measures the inflation rate. The Laspeyres formula applies in calculating the inflation rate that is defined by the consumer price index.

This paper looks at the overwhelming evidence supporting that current inflation due to economic and political pressures has adversely effected the consumer price index The consumer price index (CPI) is generally the measure of the average change in the prices paid by urban consumers for a market basket of consumer goods and services over time. Indeed, the CPI represents all goods and services purchased for consumption by a given population in a program that produces monthly data on changes in the prices paid by urban consumers for available goods and services. . Indeed, the CPI is best applied when the market has the intention to allow consumers to purchase goods and services at current market prices in equivalence to future purchases.

However, the CPI may not be applicable to all population entities and is limited in measurement where it manifests sampling and non-sampling errors (Bureau of Labor Statistics Web). Inflation is caused by many factors that include economic, political, and human activities. The current inflation due to economic and political pressures has adversely affected the consumer price index. As stated herein, there are many causes of inflation where inflation can be long-term or short term. Economic pressures like the need to have more money in the market than the value of goods and services in the market and various shocks of the economy lead to inflation conditions in the economy.

Indeed, economic shocks like increases in prices of imported raw materials, increases in costs of production, food and energy price shocks are common examples of the causes of Inflation. This form of inflation has diverse effects on the consumer price index. This is so because the market will not be in a position to effectively, adjust to the effects of the economic pressures. In addition, it causes many distortions in the economy that affect the purchasing power of the population. Moreover, this form of inflation hurts retirees living on a fixed income since when prices raises the retirees cannot buy their normal quantities as their income is fixed (Gerolamo Web).

This is a direct effect on the Customer Price Index. In addition, this boosts the value of money presently compared to the future hence they will not save thus affecting the CPI. Indeed, when inflation surfaces, persons that include factories will