Inflation and Consumer Price Indices Essay Example for Free

Inflation and Consumer Price Indices Essay A literature Review5 Methodology6 Statement Of The Problem6 Objectives Of The Study10 Summary and Conclusions10 Abstract Consumer price index has been confused by a lot of people in recent times. CPI, which is one of the most frequently used statistics to identify periods of inflation is also sometimes viewed as an indicator of the effectiveness of government economic policy. The government, business, labor, and private citizens uses price changes information provided by the CPI in the Nations economy to guide them in making economic decisions. The Consumer Price Index, as implied by the name is an index, or â€Å"a number used to measure change. Investopedia (Investopedia, N. D) defines CPI as A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. This paper attempts to explain what inflation is, types of inflation and how it is measured by the Consumer Price Index (CPI), which is the most commonly used measure of inflation. The paper also attempts to discuss the inflation behavior in Malaysia. Keywords: Inflation, Consumer Price Index, types of inflation. Introduction CPI and inflation has always been thought to be same because CPI is widely used as a measure of inflation. However the current rate of inflation is not given by CPI itself. To know the increase or decrease in the prices of goods nd services, the index must be used in the calculations. The Bank of Canada (2010) defined inflation as a persistent rise over time in the average level of prices in the economy. As demand for goods and services exceeds the economys capacity to supply those goods and services, prices tend to go up while an excess supply of goods and services tends to put downward pressure on prices. Its important to understand the difference between the many different types of inflation. When inflation is more than 50% a month, it is known as hyperinflation. There is no known history of hyperinflation in Malaysia, but it is known to have occurred in Germany (costantino bresciani-turroni, 1937) before World War II, and in Zimbabwe (michael wines, 2006) in the 2000s. Stagflation is when inflation occurs despite slow economic growth and the last time this happened in the U. S. was in the 1970s. When inflation affects different parts of the economy, its known as asset inflation because it affects just one asset. This occurred with stock portfolios when the Dow reached its peak (Google finance 2007) of 14,164. 43 on October 9, 2007. Asset inflation mostly occurs during oil-price shock. This is usually as a result of gas and oil demand predictions done by the commodities trader that the demand would go up during summer vacations. When traders become more concerned that oil supply would likely be cut off, just as during the Iran threat to close the Straits of Hormuz in 2012, (Aljazeera, 2012) traders will increase the price of oil. And as a result, price of food, which is usually transported long distances would likely be hiked. A literature Review Cheng and Tan (2002) examined in? ation in Malaysia using quarterly data over the period from 1973QI to 1997QII. The study used the Johansen (1988) cointegration, vector error-correction modeling, impulse response functions, and variance decomposition of the Sims (1980) approach. They included 11 variables in their analysis, namely CPI, money supply, interest rate, income, private expenditure, government expenditure, exchange rate, trade balance, capital in? ows, the rest of in? ation in ASEAN, and in? ation in the rest of the world. The empirical results of their study showed that external factors such as exchange rate and the rest of in? ation in ASEAN are relatively more important than domestic factors in explaining in? tion in Malaysia. Cunado and De Gracia (2005) examined the impact of various of oil price shock on in? ation in six Asian countries, namely Japan, Singapore, Korea, Philippines, Thailand, and Malaysia using quarterly data over the period from 1975Q1 to 2002Q2. The study also examined the asymmetries impact of real oil price change on in? ation. The study used the Johansen (1988) cointegration method and Granger causality test. The main results were that real oil price change has a signi? cant short-run impact on in? ation and becomes more signi? cant when real oil price shock is de? ed in local currency rather than in $US. Furthermore, the impact of real oil price change on in? ation is di? erent across economies in Asia. The real oil price change and in? ation relationship appears to be more signi? cant and more general than the real oil price change and output relationship for Asian countries. For Malaysia, the relationship between real oil price change and in? ation is less signi? cant. Moreover, there is no evidence of Granger causality from real oil price change in $US to in? ation. However, some evidence was found when real oil price change is measured in domestic currency. Also, some evidence was found for the asymmetric impact of real oil price change in $US and in domestic currency on in? ation. Methodology This paper uses data for a time span of 2005 to 2012 to analyze the inflation rate and also uses more data with a span of Jan 2011 to jun2012 to analyze the Consumer Price Index for that particular period in time. Statement Of The Problem The inflation rate in Malaysia has averaged at 2. 77 percent from the year 2005 to 2012. During this period, it would be noted from the graph below that, its highest inflation rate which is measured by Consumer price index was recorded at 8. 00 percent in July 2008. When compared to previous years, it is the highest recorded since 1986. Its lowest was also recorded at -2. 400 percent in July 2009. Exactly a year from the highest recorded.