Answer :
Final answer:
If the CPI was 112 in January and there was inflation in February, the CPI would be greater than 112, because inflation indicates an increase in the prices of goods and services that the CPI measures. The CPI is the best index to use for this purpose as it reflects the cost of living for the typical urban consumer.
Explanation:
If the Consumer Price Index (CPI) was 112 in January and the economy experienced inflation in February, then the CPI would be greater than 112. The CPI measures the prices of the goods and services purchased by the typical urban consumer, reflecting what people buy with their paycheck. In the presence of inflation, prices of these goods and services increase, leading to a rise in the CPI. The increase in CPI is calculated as the percentage increase, similar to how the rise in the cost of living is calculated using the CPI. Hence, if the CPI is higher in February than in January, it indicates inflation has occurred.
Considering a hypothetical situation where the index number representing the price level changes from one number to a higher number indicates that the inflation rate has taken effect. For example, an index number increasing from 110 to 115 suggests an inflation rate for that period, based on the percentage increase in the index.
The key difference between various price indexes is their scope and the basket of goods and services they measure. The CPI is a measure of consumer goods and services, while the Producer Price Index (PPI) and the Gross Domestic Product (GDP) deflator cover different baskets of goods with the GDP deflator adjusting for changes in what is actually purchased in the given year without biases. This makes the GDP deflator a comprehensive measure of changes in prices across the economy as a whole.
