‘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
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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