Distinguishing Rate of High Inflation from High

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Price Level

The rate of inflation along with CPI is shown in the fig 5.7 in United States during the period of 1970-2010. These figure will show the difference between high prices along with inflation. When there is rapidly increase in price level of part A then the rate of inflation is high in B part. When part A price rising slowly then the rate of inflation in B part is very low.

When the rate of inflation is high, it means that the level of price is increasing rapidly. It also means it is the period when the rising prices remain sustainable. When there is fall in price level of part a then Part B becomes negative in this case. Consumer price index is not considered the perfect mode for price level where CPI changes which describes the state of inflation. Come across with

Biased Consumer price index

Areas of bias in CPI includes

■Bias in new goods

■Bias in quantity change

■Bias in commodity substitution

■Bias in substitution of outlet

Bias in new goods

It will help you in comparing the price of computer for period of 2009 with the price of typewriter for the year 1969. The main reason is that Pc is costly than typewriter. With PC has entered it has created upward bias in inflation and CPI rate..

Bias in quantity change

Most of the items like cars along with CD players are getting advance every year. Amount we pay for these items are for advanced features and not for inflation part. But CPI has taken this form of rise in price under inflation and they have state over inflation.

Bias in commodity substitution

Relative changes in prices will lead to changes in consumer’spreference of things which they are moving to buy.

For instance, if there is rise in the prices of beef   and the prices of chicken is not changed. By changing they will get the same benefits of protein along with having enjoyment along with expenditure is same as previous one. There is no change in the protein price. But according to CPI the protein prices has increased in terms of beef.

Bias in Substitution of Outlet –

When there is high in prices people will move for such stores which give special discount. This is known as outlet substitution. CPI will not take surveys regarding that.

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