The price index values used to calculate headline and core inflation for 2012 th

Question

The price index values used to calculate headline and core inflation for 2012 through 2016 are found in Table 16P-1. [LO 16.1]

a. Calculate the annual inflation rate for each series.

b. Which series represents core inflation and which represents headline inflation? How do you know?

c. Is there inflation or deflation in each year?

Year Series 1 Series 2

2012 132.00 122.00

2013 136.22 124.56

2014 138.26 126.68

2015 143.24 129.72

2016 144.81 131.79

Karlan, Dean; Morduch, Jonathan (2017-02-07). Macroeconomics (Page 454). McGraw-Hill Higher Education. Kindle Edition.

Explanation / Answer

(a) Annual inflation rate is the percentage change in CPI, computed as follows.

(b) Core inflation is computed after excluding the highly volatile items that affects CPI. Headline inflation includes all relevant items required to compute inflation. Since Series 1 has higher CPI values each year, Series 1 is Headline inflation and series 2 is Core inflation.

(c) A deflation occurs if inflation rate is negative. Since for both series, inflation rate is positive each year, there is inflation in every year.

SERIES - 1 Year CPI % Change in CPI (Inflation) 2012 132 2013 136.22 3.20% 2014 138.26 1.50% 2015 143.24 3.60% 2016 144.81 1.10% SERIES - 2 Year CPI % Change in CPI (Inflation) 2012 122 2013 124.56 2.10% 2014 126.68 1.70% 2015 129.72 2.40% 2016 131.79 1.60%

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