Confused about this. Anyone? Go to the website of Statistics Canada (www. statca

Question

Confused about this. Anyone?

Go to the website of Statistics Canada (www. statcan.ca). For each of the past five years, find the inflation rate as measured by the consumer price index (all items)-sometimes called head- line inflation-and as measured by the CPI excluding food and energy- sometimes called core inflation. Compare these two measures of inflation. Why might they be different? What might the difference tell you about shifts in the aggregate supply curve and in the short-run Phillips curve?

Explanation / Answer

Inflation generally mean rise in prices.

A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

Source of definition is from Wiki

See this index will tell us change in price levels. Our intention is to calculate the same as per the request. And fortunately we have been asked to go for trusted database.

Now, This CPI can be taken as total called head-line inflation and by removing few things that are very volatile to the market called Core inflation.

Let me compare these two things for you :

As mentioned already headline is so volatile. From this we can say core will be used to make policies by keeping some proximity for change in prices of goods.

If head line is more and core is less then we can come to a conclusion that supply is being less and that should be the governments concern to get that into stability again , even if is for a short run

Vise versa headline will never go less than core beacuse we are subtracting volatile things from headline such that we will get core .

Ultimately , our aim is to keep prices in affordable state and keep country should be in a position to face rise in prices or fall in employment . That can be seen in Philips curve

Decreases in aggregate supply shift the short run Phillips Curve to the right, and they include: An increase in expected inflation. An increase in the price of oil from abroad. A negative supply shock, such as damage from a hurricane anything that effect price literally inflation will be considered

From the above detailing you should have understood how they both are co related.

Write back to us if you have any doubts :)

Happy reading !

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