CAS EC 102 Lecture 4: CPI, Inflation and Interest Rates

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Cas ec 102, lecture #4, cpi, inflation and interest rates. Reasons why cpi may overstate inflation: substitute bias: the cpi uses fixed weights, so it cannot reflect on consumers" ability to substitute toward goods whose relative prices have fallen. Bls only collects data from full-price retail stores, not taking into account the lower-price outlets. So the price of the basket is higher. Cpi vs gdp deflator: the cpi is a more focused measure, looking at the stuff that consumers buy. Whereas the gdp deflator includes all goods: the cpi includes imported goods. Whereas the gdp deflator includes goods only made within the country: the cpi uses a fixed basket of goods, whereas the gdp deflator uses a changing basket of goods. Disinflation vs deflation: disinflation is when inflation is going down. The prices are still rising, but at a lower rate: deflation is when the prices are actually going down.

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