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Friday, 15 July 2011

Consumer Price Index - Part 1 of 2

Consumer Price Index - Part 1 of 2

Updated on 20-7-11

“The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.”

 
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.

The CPI is a non–monetary index value measuring changes in the weighted average of prices quoted in the unstable monetary unit of a typical basket of consumer goods and services. The annual per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.

We use the annual change in the CPI as a measure to calculate and account the erosion of real value caused by inflation in only monetary items (which cannot be inflation-adjusted in ledger accounts and current period financial reports published during the current accounting period) under CIPPA. The net monetary loss or gain resulting from holding either a net weighted average excess of monetary item assets or a net weighted average excess of monetary items liabilities during a specific period is not accounted under the traditional HCA model used by most entities worldwide. It is calculated and accounted when financial capital maintenance is measured in units of constant purchasing power under CIPPA as authorized in IFRS in the original Framework (1989) Par 104 (a) during inflation and deflation and under Constant Purchasing Power Accounting (CPPA) during hyperinflation as required by IAS 29.

The annual change in the CPI is also used to calculate the erosion of real value caused by the stable measuring unit assumption – i.e. by the HCA model – (not inflation) in constant real value non–monetary items never maintained constant (thus being treated as monetary items) over time in an inflationary economy only under the Historical Cost paradigm. This cost of the stable measuring unit assumption is – like the cost of inflation – not accounted under HCA. Most people mistakenly believe this erosion in, for example, companies´ capital and profits never covered by sufficient revaluable fixed assets, is caused by inflation. This cost of the stable measuring unit assumption only incurred under the HCA model is mistakenly believed by most people to be the same as the cost of inflation. They are taught and thus mistakenly believe that it is caused by inflation. Since the cost of inflation (the net monetary loss from holding a net weighted average excess of monetary item assets over net weighted average monetary item liabilities during inflation) is not calculated and accounted under the HCA model, entities – mistakenly believing that the cost of the stable measuring unit assumption is the same as the cost of inflation – are satisfied to do nothing about it because net monetary losses and gains are not calculated and accounted under HCA. They are taught and thus mistakenly believe that both are caused by inflation and that it is not their but the central bank´s duty to lower inflation and lower this erosion.


Nicolaas Smith

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