lesson

Consumer price index (CPI)

After you have worked through this section of the learning unit, you should be able to:

define the consumer price index
distinguish between deflation and disinflation
describe how the CPI is compiled in South Africa
interpret and describe the uses of the CPI using relevant data sources
deflate a time series using the CPI
describe the advantages and disadvantages of the CPI

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Study Instructions

Study chapter 6.3 of the textbook.

Watch the video clip on CPI.

Do the activities.

Introduction
CPI
Activities

Introduction

CPI

Watch the following video clip on CPI:

Consumer price index (CPI): Activities

1. The CPI is an index of prices of all consumer goods and services.

True

Incorrect. The statement is false.

The CPI is an index of a representative basket of consumer goods and services.

False

Correct. The statement is false.

The CPI is an index of a representative basket of consumer goods and services.

2. Since the CPI is a representative basket of goods and services, it follows that it correctly reflects your expenditure on goods and services.

True

Incorrect. The statement is false.

The goods and services and their weights that are included in the CPI are based on detailed surveys about the income and expenditure of many households. It represents the expenditure of an average South African household and therefore does not correspond to the exact expenditure of your household.

False

Correct. The statement is indeed false.

3. The CPI is an inflation rate.

True

Incorrect. The statement is false.

The CPI is a price index that can be used to measure inflation.

False

Correct. The statement is indeed false.

The CPI is a price index that can be used to measure inflation.

4. The rate of change in the CPI is one of the possible measures of inflation.

True

Correct. The statement is indeed true.

Calculating the rate of inflation using the CPI involves calculating the rate of change in the CPI.

False

Incorrect. The statement is true.

Calculating the rate of inflation using the CPI involves calculating the rate of change in the CPI.

5. If the general price level changes from 8% to 6%, then …

deflation occurs.

Incorrect.

Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.

Disinflation is a decline in the rate of increase in the general price level of goods and services.

disinflation occurs.

Correct.

Disinflation is a decline in the rate of increase in the general price level of goods and services.

Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.

6. If the general price level decreases, then …

deflation occurs.

Incorrect.

Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.

disinflation occurs.

Correct.

Disinflation is a decline in the rate of increase in the general price level of goods and services. This might happen when the inflation rate changes from 8% to 6%. The price level is still increasing.

inflation occurs.

Incorrect.

Inflation is an increase in the general price level.

7. The prices of all the goods and services in the CPI basket are collected every month.

True

Incorrect. The statement is false.

While the prices of most goods are collected monthly, some services such as rentals, train fares and taxi fares are collected every three months.

False

Correct. The statement is indeed false.

While the prices of most goods are collected monthly, some services such as rentals, train fares and taxi fares are collected every three months.

8. The weights allocated to different kinds of goods and services have remained unchanged since 1995.

True

Incorrect. The statement is false.

Since 1995 there have been a number of changes in the weights. See table 6.1 of the textbook.

False

Correct. The statement is indeed false.

Since 1995 there have been a number of changes in the weights. See table 6.1 of the textbook.

9. The weight allocated to transport in the 2016 basket is less than the weight allocated to transport in the 2012 basket.

True

Correct. The statement is indeed true.

The weight allocated to transport in 2016 was 14,28, whereas in 2012 it was 15,40. See table 6.1 of the textbook.

False

Incorrect. The statement is false.

The weight allocated to transport in 2016 was 14,28, whereas in 2012 it was 15,40. See table 6.1 of the textbook.

10. A 10% increase in the price of food and non-alcoholic beverages will have a greater impact on the value of the CPI than a 10% increase in the price of education.

True

Correct. The statement is indeed true.

Currently (2020) the weight of food and non-alcoholic beverages is 17,24, whereas for education it is 2,53. A 10% increase in the price of food and non-alcoholic beverages will therefore have a greater impact on the value of the CPI than a 10% increase in the price of education.

False

Incorrect. The statement is true.

11. Alcoholic beverages and tobacco have a higher weight (5,82) than education (2,53) since the proportion that households spend on alcoholic beverages and tobacco is greater than spending on education.

True

Correct. The statement is indeed true.

False

Incorrect. The statement is true.

12. One of the factors that determine the weight is the proportion that households spend on goods and services.

True

Correct. The statement is indeed true.

One of the factors that determine the weight is the proportion that households spend on goods and services.

False

Incorrect. The statement is true.

One of the factors that determine the weight is the proportion that households spend on goods and services.

Questions 13 to 15 are based on Statistical Release P0141, Consumer Price Index April 2020.

13. The base period for the CPI is December 2016.

True

Correct. The statement is indeed true.

The base period for the CPI is December 2016.

[Insert video clip]

False

Incorrect. The statement is true.

The base period for the CPI is December 2016.

[Inset video clip]

14. What is the value of headline CPI for all urban areas for April 2020?

Correct. Headline CPI for all urban areas for April 2020 is 115. See table A.

[Insert video clip]

Incorrect. Headline CPI for all urban areas for April 2020 is 115. See table A.

[Insert video clip]

15. For April 2020 food and non-alcoholic beverages made the biggest contribution of the different groups to the annual percentage change in the CPI headline.

True

Incorrect. The statement is false.

The contribution of food and non-alcoholic beverages was 0,7 percentage points, whereas for housing and utilities it was 1,1 percentage points.

[Insert video clip]

False

Correct. The statement is indeed false.

The contribution of food and non-alcoholic beverages was 0,7 percentage points, whereas for housing and utilities it was 1,1 percentage points.

[Insert video clip]

Questions 16 and 17 are based on the Consumer prices June 2020 published in the Quarterly Bulletin, June 2020 of the South African Reserve Bank.

16. The data published by the South Africa Reserve Bank is seasonally adjusted.

True

Correct. The statement is indeed true.

The data is seasonally adjusted.

False

Incorrect. The statement is true.

The data is seasonally adjusted.

17. For May 2017 the seasonally adjusted CPI was 102,7.

True

Incorrect. The statement is false.

This is the seasonally unadjusted CPI published by Stats SA.

[Image]

The seasonally adjusted figure is 101,9 and is published by the South African Reserve Bank.

[Image]

False

Correct. The statement is indeed false.

This is the seasonally unadjusted CPI published by Stats SA.

[Image]

The seasonally adjusted figure is 101,9 and is published by the South African Reserve Bank.

[Image]

18. Complete the following by deflating the time series for gross fixed investment:

Year	Gross fixed investment at current prices (R millions)	CPI (December 2016 = 100)	Gross fixed investment at constant (2016) prices (R millions)
2013	749 185	82,9
2014	780 077	88,0
2015	849 975	92,0
2016	841 920	97,8
2017	865 319	103,0

Click to Show Answer

Year	Gross fixed investment at current prices (R millions)	CPI (December 2016 = 100)	Gross fixed investment at constant (2016) prices (R millions)
2013	749 185	82,9	903 721
2014	780 077	88,0	886 451
2015	849 975	92,0	923 886
2016	841 920	97,8	860 859
2017	865 319	103,0	840 116

The calculation for 2014 is:

$$
\Biggl(
\frac{\text{Gross fixed investment at current prices 2014}}{\text{CPI index for 2014}}
\Biggl)
\times 100
$$

$$
\Biggl(
\frac{\text{780 077}}{\text{88,0}}
\Biggl)
\times 100
$$

= 886 451

19. The CPI is an implicit price index.

True

Incorrect. The statement is false.

It is an explicit price index since the index is calculated directly from the prices of goods and services.

False

Correct. The statement is indeed false.

It is an explicit price index since the index is calculated directly from the prices of goods and services.

20. One of the disadvantages of the CPI is that changes in the composition of consumer expenditure are ignored.

True

Correct. The statement is indeed true.

Since the weights are fixed, changes in the composition of expenditure are ignored.

False

Incorrect. The statement is true.

Since the weights are fixed, changes in the composition of expenditure are ignored.

21. One of the disadvantages of the CPI is that it includes all consumer goods and services.

True

Incorrect. The statement is false.

One of the disadvantages of the CPI is that it does not include all consumer goods and services.

False

Correct. The statement is indeed false.

One of the disadvantages of the CPI is that it does not include all consumer goods and services.

22. An increase in value-added tax (VAT) will increase the CPI since the prices used to calculate the CPI include VAT.

True

Correct. The statement is indeed true.

Prices used to calculate the CPI include VAT.

False

Incorrect. The statement is true.

Prices used to calculate the CPI include VAT.

Concepts

Consumer price index (CPI)

An index of a representative basket of consumer goods and services.
Deflation

A decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.
Disinflation

A decline in the rate of increase in the general price level of goods and services.

Introduction, index numbers and price indices

Calculating an Inflation Rate

Glossary

Introduction

CPI

Consumer price index (CPI): Activities

1. The CPI is an index of prices of all consumer goods and services.

2. Since the CPI is a representative basket of goods and services, it follows that it correctly reflects your expenditure on goods and services.

3. The CPI is an inflation rate.

4. The rate of change in the CPI is one of the possible measures of inflation.

5. If the general price level changes from 8% to 6%, then …

6. If the general price level decreases, then …

7. The prices of all the goods and services in the CPI basket are collected every month.

8. The weights allocated to different kinds of goods and services have remained unchanged since 1995.

9. The weight allocated to transport in the 2016 basket is less than the weight allocated to transport in the 2012 basket.

10. A 10% increase in the price of food and non-alcoholic beverages will have a greater impact on the value of the CPI than a 10% increase in the price of education.

11. Alcoholic beverages and tobacco have a higher weight (5,82) than education (2,53) since the proportion that households spend on alcoholic beverages and tobacco is greater than spending on education.

12. One of the factors that determine the weight is the proportion that households spend on goods and services.

13. The base period for the CPI is December 2016.

14. What is the value of headline CPI for all urban areas for April 2020?

15. For April 2020 food and non-alcoholic beverages made the biggest contribution of the different groups to the annual percentage change in the CPI headline.

16. The data published by the South Africa Reserve Bank is seasonally adjusted.

17. For May 2017 the seasonally adjusted CPI was 102,7.

18. Complete the following by deflating the time series for gross fixed investment:

19. The CPI is an implicit price index.

20. One of the disadvantages of the CPI is that changes in the composition of consumer expenditure are ignored.

21. One of the disadvantages of the CPI is that it includes all consumer goods and services.

22. An increase in value-added tax (VAT) will increase the CPI since the prices used to calculate the CPI include VAT.