Inflation and Analysis of Monetary Policies

ECO 561

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Inflation and Analysis of Monetary Policies

“Inflation is a rise in the general level of prices of goods and services in an economy over a period of time” (Litra 2009). Inflation is measured by calculating the percentage change from year to year, or over a period of years, of the Consumer Price Index or CPI. Analyzing certain aspects of the CPI and CPI baskets specifically, we can evaluate the trends of products, along with determine how using CPI can help as a business manager or business owner. This paper will analyze the CPI basket of footwear, as shoes are something that are worn by nearly everyone in the United States.

Consumer Price Index

The CPI acts as a pointer for the Federal Reserve Board’s money-based policy and is extremely important aid in calculating how our nation’s output and living standards change. It is used to decide/figure out once a year cost of living raises for those individuals on social security or those retired and any other individuals who are receiving some form of federal payments (Csipak & Zuccaro 2014). The CPI is used as an economic indicator. “The CPI is like a report card for the Fed. One of the stated missions of the Fed is to establish a low inflation rate, ideally about 1 to 2%” (CPI Inflation Calculator).

CPI Market Basket

The CPI rate for certain items are lumped into categories or baskets for the CPI. It would not make sense to have a CPI for every brand or type of show in the United States. Instead we have a CPI basket for “footwear”. This basket includes information and data from all shoe companies, brands, and associated items. Looking at the below FRED graph ranging from 1995 to 2015, we can see that the CPI for the footwear category has risen. During the time period of 2002 to 2004 during our nation’s recession after 9/11 it can be seen that CPI for footwear actually dropped slightly before regaining ground.

Looking at the inflation rate or percent change in the footwear category, one can see that from 1995 to 2005 there was an actual dip in CPI. However, from 2005 to 2010, and 2010 to 2015 there was an increase in CPI or inflation.

Overall Trends in Inflation

Looking at the overall inflation from the last five years, and comparing that to my own salary, you can see that my salary has kept above the inflation rate from the past five years.

Although the CPI has risen each year in the past five, indicating inflation by a positive percentage change, it’s clear to see that my income rate or percentage change has outpaced inflation. The graphs below clearly represent this information.

Being fortunate enough to have outpaced inflation dramatically with my salary through the years, it has not negatively impacted my family. It has impacted my family, as it has impacted everyone. The prices of goods and services has risen in the past five years, and it costs more money to live the same life today than it did five or ten years ago. There are several familes across the nation who’s salary has not kept pace with inflation. This means that they are making the same amount of money, but have to pay out more to live. If they are not receiving the proper amount of raises such as cost of living, it’s hard to keep pace with inflation.

Using CPI Statistics

Business managers, such as human resource managers, would use the CPI to determine the raises the employees at an organization may receive. Human resource managers, if they are responsible for compensation within an organization have to keep abreast of the CPI and Inflation in order to determine an organization’s cost of living raises, or even raises for the employees that are not considered cost of living. According to the Michigan Chamber of Commerce “many human resource and compensation professionals use the Consumer Price Index to help guide merit increase budgets and determine cost of living increases” (Unkown 2014).

Conclusion

The consumer price index is vital for not only businesses, but individuals to monitor and keep track of. Monitoring the CPI inflation rate will allow organizations to ensure they are keeping up with inflation in regards to their employees pay. The CPI mirrors the cost of living, employees and individuals need to ensure that their salaries are staying on pace with the CPI inflation rates (Larsen 2007). If an individual is not receiving any type of raises, inflation impacts them greater than someone who’s wages are keeping pace with or exceeding inflation. Inflation results in higher prices, if you’re not receiving higher wages, but you’re paying higher prices, you’re going to have less money. This is a key aspect for companies to monitor closely in respect to their employee’s wages.

References

Litra, A. (2009). The Inflation Rate Determined As A Change In The GDP Deflator and In CPI. Bulletin of the Transilvania University of Brasov. Economic Science. Retrieved from http://search.proquest.com.contentproxy.phoenix.edu/citedreferences/MSTAR_209550255/11AE692C5B714BFCPQ/1?accountid=35812

Csipak, J., & Zuccaro, C. (2014). The CPI Market Basket: A Review of Economic and Marketing Validity Issues. Journal of Economics and Economic Education Research. Retrieved from http://search.proquest.com.contentproxy.phoenix.edu/docview/1647669784?pq-origsite=summon&accountid=458

CPI Inflation Calculator (n.d.). What is a Basket of Goods? Retrieved from http://cpiinflationcalculator.com/what-is-a-basket-of-goods/

Larsen, E. (2007). Does the CPI Mirror the Cost of Living? The Scandinavian Journal of Economics. Retrieved from http://www.jstor.org.contentproxy.phoenix.edu/stable/4626210?pq-origsite=summon&seq=1#page_scan_tab_contents

Unkown (2014). How HR Professionals Use the Consumer Price Index (CPI). Retrieved from http://www.michamber.com/how-hr-professionals-use-consumer-price-index-cpi