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Showing posts with label Consumer Price Index. Show all posts
Showing posts with label Consumer Price Index. Show all posts

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.


Nicolaas Smith Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Friday, 16 October 2009

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.”

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

The CPI is a non-monetary index number measuring changes in the weighted average of prices quoted in the functional currency of a typical basket of consumer goods and services. The 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 change in the CPI as a measure to calculate the destruction of real value in monetary items (which cannot be indexed) and constant items never maintained (thus being treated as monetary items) over time in an inflationary economy implementing the HCA model. We also use the change in the CPI as a measure to calculate the creation of real value in monetary items (never indexed) and constant items never maintained (never decreased) over time in a deflationary economy. The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.

There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to maintain the real value of constant items in the economy with measurement of financial capital maintenance in units of constant purchasing power being used as the fundamental model of accounting. The CPI is used to calculate the destruction of real value in constant items never maintained in low inflationary economies using HCA as the fundamental model of accounting.

The real value of money is automatically updated by inflation and deflation. Whereas the price of a constant item should change inversely with the change in the real value of money, the real value of money changes inversely with the change in the level of the CPI.

The CPI is the sine qua non in an inflationary and deflationary economy for correcting the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure. It would be impossible to measure inflation and deflation without the CPI. Consequently it would also have been impossible to stop the destruction of the real value in constant real value non-monetary items never maintained (generally retained profits and issued share capital of companies using HCA during inflation with no fixed assets or not sufficient fixed assets to maintain equity´s real value).

This massive destruction of the real value of SA companies´ and banks´ retained profits never maintained, unknowingly perpetrated by SA accountants implementing their very destructive stable measuring unit assumption during low inflation would have been impossible to stop without the CPI. The CPI makes it easy to fix the problem and to stop our accountants destroying about R200 billion each and every year in the SA real economy.

When our accountants freely start measuring financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a), then they will maintain all constant items in the SA economy for an unlimited period of time by updating them in terms of the change in the CPI instead of destroying their real values at a rate equal to the inflation rate as they are unknowingly doing right now. They would do that even in companies with no fixed assets at all. The "equivalent fixed assets requirement" is only applicable with the stable measuring unit assumption.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.