that have become relatively more expensive and increasing purchases of products that
have become relatively cheaper. For example, suppose that the price of hamburgers
suddenly doubled. Americans currently eat a lot of hamburgers, but in the face of
such a price rise many of them would switch to cheaper foods. A price index based on
a market basket with a lot of hamburgers in it would overstate the true rise in the cost
of living.
The second reason arises from innovation. In 1985 many of the goods we now take
for granted, especially those using information technology, didn’t exist: there was no
Internet and there were no iPhones. By widening the range of consumer choice, innova-
tion makes a given amount of money worth more. That is, innovation is like a fall in
consumer prices. For both of these reasons, many economists believe that the CPI
somewhat overstates inflation when we think of inflation as measuring the actual
change in the cost of living of a typical urban American family. But there is no consen-
sus on how large the overstatement is, and for the time being, the official CPI remains
the basis for most estimates of inflation.
The United States is not the only country that calculates a consumer price index. In
fact, nearly every country calculates one. As you might expect, the market baskets that
make up these indexes differ quite a lot from country to country. In poor countries,
where people must spend a high proportion of their income just to feed themselves,
food makes up a large share of the price index. Among high -income countries, differ-
ences in consumption patterns lead to differences in the price indexes: the Japanese
price index puts a larger weight on raw fish and a smaller weight on beef than ours
does, and the French price index puts a larger weight on wine.
Other Price Measures
There are two other price measures that are also widely used to track economy - wide
price changes. One is the producer price index(or PPI,which used to be known as the
wholesale price index). As its name suggests, the producer price index measures the cost
of a typical basket of goods and services—containing raw commodities such as steel,
electricity, coal, and so on—purchased by producers. Because commodity producers are
relatively quick to raise prices when they perceive a change in overall demand for their
module 15 The Measurement and Calculation of Inflation 145
Section 3 Measurement of Economic Performance
figure 15.2The CPI, 1913–2009
Since 1940, the CPI has risen steadily.
But the annual percentage increases
in recent years have been much
smaller than those of the 1970s and
early 1980s. (The vertical axis is
measured on a logarithmic scale so
that equal percent changes in the CPI
appear the same.)
Source:Bureau of Labor Statistics.YearLog CPI
(1982 – 1984 = 100)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.019131920 1930 1940 1950 1960 1970 1980 1990 20002009The producer price index,or PPI,
measures changes in the prices of goods and
services purchased by producers.