If the core CPI is a better measure of the inflation rate than the? CPI, why is

Question

If the core CPI is a better measure of the inflation rate than the? CPI, why is the CPI more widely? used? In? particular, can you think of reasons the federal government uses the CPI when deciding how much to increase social security payments to retired workers to keep the purchasing power of the payments from? declining?

A.) CPI is not as widely understood or intuitive as core CPI and allows for more discretionary choices in measurement. Using CPI allows the government a degree of choice in how much to increase social security? payments, allowing the government to apply informal fiscal policy.

B.) CPI provides a more reliable measure of underlying trends in inflation than does core CPI. Using CPI allows for more stable and predictable changes in social security? payments, allowing retired workers to better plan their finances.

C.) CPI incorporates price changes in some important goods and services purchased by typical households that core CPI does not. Using CPI better ensures that social security payments adequately rise with the prices of essential goods and services that retired workers buy.

D.) It is easier and less expensive to collect the data required to calculate CPI than it is for core CPI. The additional costs and higher taxes that would be required to measure core CPI are not worth the gains provided by that measurement over CPI.

Explanation / Answer

Core CPI is CPI minus inflation for food and energy prices. It measures core inflation that is more stable and predictable because food and energy prices are more volatile. Hence the Federal Reserve uses core inflation or core CPI and not CPI. However, CPI is more widely? used because COLA or cost of living adjustment requires that a selected index is able to account for the goods and services usually purchased by the elderly. This is done by CPI and not core CPI.

Select option C)

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