-- - - ---454 INFLATION AND PRICECHANGE -
Average price change(LSI) is 1229= 1046(1 +i)10
solving forifor saddles =1.6% per year
Step 2
Call a stable and a tack shop to obtain the current price of a registered pony at $600 and leather
pony saddle at $350.Step 3
Using the current prices for both the pony and saddle,inflatethese costs at the respectiveprice
change ratescalculated in Step 1. The assumption you are making is that the prices for ponies
and saddles will change in the next 5 years at the same rate as the average of the last 10 years.
The cost for the two items, and the total, in 5 years will be:Pony cost in 5 years=600(1 + 0.098)5=$958
Saddle cost in 5 years =350(1 + 0.016)5=$378
Total cost in 5 years=$958 + $378=$1336
Step 4
Your final step is to calculate the amount that must be set aside today at 4% interest for 5 years
to accumulate the future cost.Amount invested noW= 1336(1 + 0.04)-5=$1098
So it will require $1098 today to make Veronica a very happy pony rider on her fifth birthday!
Composite cost indexes do not track historical prices for individual items. Instead, they
measure the historical prices ofgroupsorbundlesof assets. Thus a composite index mea-
sures the overallprice change that is a composite of severaleffects. Examples of composite
indexes include theConsumer Price Index(CPI) and theProducer Price Index(PPI). The
CPI measures the effect of prices as experienced by consumers in the U.S. marketplace,
and the PPI measures prices as felt by producers of goods in the U.S. economy.
The CPI, an index calculated by the Bureau of Labor Statistics, tracks the cost of a
standardbundle of consumergoodsfrom year to year.This "consumer bundle" or "basket of
consumer goods" is made up of common consum~rexpenses including housing, clothing,
food, transportation, and entertainment. Because of its focus on consumer goods, people
often use the CPI as a substitute measure for general inflation in the economy. 'Dtere are
several problems with the use of the CPI in this manner, one being the assumption that
all consumers purchase the same "basket of consumer goods" year after year. However,
even with its deficiencies,the CPI enjoys popular identificationas an "inflation" indicator.
Table 14-2 gives the yearly index values and annual percent increase in the CPI for the past
30 years.J