Inflation and Analyses of Monetary Policies

Inflation and Analyses of Monetary Policies

ECO/561

Introduction

Over a lifetime a person will spend a good portion of their money on gas and motor oil for their vehicle. Americans spend a little less than $1,968 a year on gas and motor oil. That works out to $164 a month. Spending in this category increased 3.1% in the past year, the first increase since 2012. Gas prices averaged $2.84 a gallon as of September 13, up 18 cents from $2.66 a year ago, according to AAA. This paper will go into analyzing the Consumer Price Index (CPI) index for gasoline for the years 1995-2015 to see what inflation changes occurred and what that means for the consumer. In addition to the inflation changes, the author will give his personal perspective on inflation in reference to personal income changes. Finally, the author will discuss the use of CPI statistics by business managers.

Inflation and Analyses of Monetary Policies

The composition of the market basket for the CPI is based on spending patterns of the urban consumers in a specific time (McConnell, Bruce and Flynn, 2015). The rate of inflation is equal to the percentage growth of CPI from one year to the next and is demonstrated in the example below from CPI in 2007(207.3) and 2006 (201.6):

The CPI for gasoline over the years 1995, 2005, 2010 and 2015 shows a steady increase with a slight dip in 2015 shown in the graph below.

The annual average for gas was 99.79 in 1995, ascending to 194.68 in 2005 and increasing again to 238.59 in 2010 and lastly a slight decrease to 212.01 in 2015.

Trends in Inflation

Various indexes have been devised to measure different aspects of inflation. Inflation has been defined as a process of continuously rising prices or, equivalently, of a continuously falling value of money. When inflation occurs, each dollar of income will buy fewer goods and services than before (McConnell, Bruce and Flynn, 2015). Figure 1 shows a rise in prices from 2013, 2014 and 2015 by 2%. In 2016 prices stayed the same and increased by 1% in 2017 and 3% in 2018.

Figure 1. Consumer Price Index for All Urban Consumers: All Items

https://fred.stlouisfed.org

By using seasonally adjusted data, some users find it easier to see the underlying trend in short term price change. The graph below shows the increase of my annual income over the last 5 years. 2013 and 2014 showed no changes in my annual income while CPI showed a 2% increase. My annual income increased by 28% in 2017, 33% in 2018 and 1% in 2019.

Conclusion

The CPI affects nearly all Americans because use of the way it is used. It is used as an economic indicator, means of adjusting dollar value and deflator of other economic series The CPI uses a cost of living index to determine if individuals are affected by the inflation of gasoline or other goods and services. According to the BLS (2019), a cost of living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. This information is useful to managers to show statistical trends for employment purposes. Although my annual income increased over the last 5 years, I was still affected by inflation of gas prices. Gas prices increased, which made driving to work expensive. In addition, because I made more I also spent more. In the aggregate, households increase their spending as their disposable income rises and spend a larger proportion of a small disposable income than of a large disposable income (McConnell, Bruce and Flynn, 2015).