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Wednesday, 20 July 2011

Consumer Price Index - Part 2 of 2

Consumer Price Index - Part 2 of 2

We also use the annual change in the CPI as a measure to calculate the creation of real value in monetary items and constant real value non–monetary items never maintained constant (nominal values never decreased in line with deflation) over time in a deflationary economy that uses the HCA model.


Financial capital maintenance is measured in units of constant purchasing power by valuing only constant items – per se – in terms of the change in the CPI on a monthly basis during inflation and deflation (CIPPA). Financial capital maintenance is measured in units of constant purchasing power by valuing all non–monetary items (variable and constant items) – per se – on a daily basis in terms of the change in the US Dollar parallel rate (when it exists officially or unofficially) or a Brazilian–style daily non–monetary index during hyperinflation (Constant Purchasing Power Accounting – CPPA).

There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to correctly index the real value of constant items in the economy with continuous measurement of financial capital maintenance in units of constant purchasing power (CIPPA) being used as the fundamental model of accounting during inflation and deflation.

The nominal value of money stays the same over time while the real value of money is automatically determined by inflation and deflation: eroded by inflation and increased by deflation, respectively. The nominal value of a constant item changes inversely with the level of the CPI with measurement in units of constant purchasing power under CIPPA resulting in its real value remaining constant during inflation and deflation. The real value of money changes inversely with the level of inflation.

The CPI is the sine qua non in an inflationary and deflationary economy to correctly fix the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: the monetary unit of account has no fundamental constant. Under the Historical Cost paradigm (implementing the HCA model) it is assumed that money is perfectly stable in all cases where the stable measuring unit assumption is applied.

It would be difficult to measure the erosion in the real value of money and the creation of real value in money correctly during inflation and deflation, respectively, and to correctly implement financial capital maintenance in units of constant purchasing power without the CPI during inflation and deflation. The CPI is calculated during hyperinflation, but, it is impossible to maintain the constant purchasing power of constant items constant in terms of the CPI that becomes available a month or more after a transaction or event during hyperinflation of hundreds of millions or more per cent per annum. The daily change in the parallel or index rate is used for that purpose during hyperinflation. See Brazil´s use of daily indexing during very high and hyperinflation from 1964 to 1994.

Financial capital maintenance in units of constant purchasing power in terms of the CPI makes it relatively easy to fix the problem and to stop the erosion of hundreds of billions of US Dollars in real value in the world´s constant item economy each and every year during low inflation.


Nicolaas Smith

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