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Wednesday, 7 December 2011

Consumer Price Index

Consumer Price Index
         The CPI is the weighted average index value of a typical basket of consumer goods purchased by a typical consumer statistically stated as a non–monetary initial index value of 100 at the start date. The CPI is thus fixed in real terms – not in nominal terms. It changes monthly in nominal terms, but, it stays fixed in real terms.

         An example is the harmonized consumer price index of the Euro Area stated as the non–monetary index value of 100 in 2005. This fixed internal unit of real value is then compared to the weighted average price of the typical basket of consumer goods and services a year later in order to determine the annual rate at which inflation is eroding the real value of only money and other monetary items in only the monetary economy or deflation is creating real value in only money and other monetary items in only the monetary economy. Inflation and deflation have no effect on the real value of non–monetary items. The same is true for hyperinflation.

            The stable measuring unit assumption (not inflation and hyperinflation) erodes the real value of constant items never maintained constant (never measured in units of constant purchasing power in a double–entry accounting model where the real value of capital is equal to the real value of net assets) during inflation and hyperinflation under the Historical Cost paradigm. Similarly, it is not deflation, but, the stable measuring unit assumption that creates real value in constant items never maintained constant (qualified as per the previous sentence) during deflation under HCA.

       The annual percentage change in the CPI indicates the annual rate at which only the real value of the national (or monetary union, e.g. the European Monetary Union) monetary unit (money) and other monetary items is being eroded by the economic processes of inflation and hyperinflation or being increased by the economic process of deflation.


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