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Friday, 8 June 2012

Consumer Price Index

 Consumer Price Index



‘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.’



(Vink, Kirsten and Woerman, 2004)



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 centage 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 the weighted 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.



The daily change in the CPI would be used as a measure to calculate and account the erosion of real value caused by inflation in only monetary items under financial capital maintenance in units of constant purchasing power (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 calculated and accounted under the traditional HCA model during low inflation and deflation. It is also calculated and accounted during hyperinflation as required by IAS 29.



The daily change in the CPI would be used to calculate the net constant item loss from holding an excess of constant item assets not maintained constant over constant item liabilities not maintained constant at all levels of inflation and deflation under financial capital maintenance in units of constant purchasing power (CIPPA). Likewise it would be used to calculate the net constant item gain from holding an excess of constant item liabilities not maintained constant over constant items assets not maintained constant at all levels of inflation and deflation under CIPPA.



The cost of the stable measuring unit assumption is – like the cost of inflation – not calculated and accounted under HCA during inflation and deflation. Most people mistakenly believe the erosion in, for example, companies´ capital and profits - in fact, never maintained constant by the real value of net assets because of the implementation of stable measuring unit assumption - is caused by inflation. However, inflation has no effect on the real value of non-monetary items and capital and retained profits are constant real value non-monetary items. Thus, the cost of the stable measuring unit assumption is mistakenly believed by most people to be the same as the cost of inflation. They do not know that it is caused by the stable measuring unit assumption. They are taught that the erosion of companies´ capital and retained profits is caused by inflation. Since the cost of inflation is not calculated and accounted under the HCA model, entities – mistakenly treating constant items like monetary items, e.g., in the case of trade debtors and trade creditors as well as mistakenly believing that the erosion of companies’ capital and retained profits is caused by inflation - are satisfied to do nothing about it because net monetary losses and gains are not calculated and accounted under HCA during low inflation and deflation. They see it as the central bank´s duty to lower inflation and lower this erosion. They believe it has nothing to do with the accounting profession.



There is no CPI in a barter economy since there is no money in such an economy. The Daily CPI is essential in practice to 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 change in the real value of money is indicated by the rate of inflation and deflation. The nominal value of a constant item changes inversely with the rate of daily inflation or deflation 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 rate of inflation and deflation.



The Daily CPI is the sine qua non under financial capital maintenance in units of constant purchasing power (CIPPA) in an inflationary and deflationary economy to correctly fix the problem created by the fact that money is the only global 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 it is assumed that money was, is and will always be perfectly stable in all cases where the stable measuring unit assumption is applied.



It would be difficult to measure the erosion and creation of real value in monetary items correctly during inflation and deflation, respectively, and to correctly implement financial capital maintenance in units of constant purchasing power without the CPI. 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 a parallel or daily 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 Daily CPI makes it relatively easy to fix this 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 inflation.



Nicolaas Smith

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