Consumer price index

Definition

The consumer price index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as food, transportation, and healthcare. It is used to assess price changes associated with the cost of living and inflation. Understanding CPI is crucial during times of economic stagflation, as it reflects how rising prices impact consumers' purchasing power.

5 Must Know Facts For Your Next Test

1. During Ford's presidency, the CPI rose significantly due to factors like oil embargoes and supply chain disruptions, contributing to economic stagflation.
2. The CPI is calculated by taking price changes for each item in a predetermined basket of goods and averaging them, reflecting how much more or less expensive things are compared to previous periods.
3. The period of economic stagflation in the 1970s saw a dramatic rise in the CPI, indicating that despite economic growth challenges, consumer prices continued to increase.
4. Ford's administration faced significant pressure to control inflation as indicated by rising CPI figures, which impacted public sentiment and economic policy decisions.
5. The relationship between CPI and interest rates became a key focus during Ford's presidency as policymakers sought to manage inflation without stifling growth.

Review Questions

• How does the consumer price index relate to economic conditions such as inflation during Ford's presidency?
  • The consumer price index (CPI) directly relates to inflation by measuring the average change over time in the prices paid by consumers for goods and services. During Ford's presidency, rising CPI figures indicated increasing inflation levels, which significantly affected consumers' ability to purchase goods. The high CPI was indicative of broader economic issues, such as stagflation, where both inflation and stagnant economic growth presented unique challenges for policymakers.
• Evaluate the impact of the rising consumer price index on public policy decisions during Ford's time in office.
  • As the consumer price index rose during Ford's presidency, it forced the administration to confront the dual challenges of inflation and stagnant economic growth. This situation led to public policies aimed at controlling inflation without exacerbating unemployment or slowing down growth. The administration implemented measures such as promoting voluntary wage and price controls while also encouraging energy conservation to mitigate inflationary pressures stemming from oil crises.
• Assess the implications of stagflation on consumer behavior and the economy in relation to the consumer price index during the 1970s.
  • Stagflation had profound implications for consumer behavior and the economy during the 1970s, particularly as reflected in the consumer price index. High CPI figures indicated not only rising prices but also a decline in purchasing power, leading consumers to alter their spending habits by prioritizing essential goods over luxury items. This shift contributed to broader economic uncertainty, creating a cycle where decreased consumer spending further hampered economic growth while inflation continued to escalate, making it challenging for policymakers to find effective solutions.

Related terms

Inflation: A general increase in prices and fall in the purchasing value of money, often measured by CPI.

Stagflation: An economic situation characterized by stagnant growth, high unemployment, and high inflation, making it difficult for policymakers to address.

Deflation: A decrease in the general price level of goods and services, often leading to reduced consumer spending and economic stagnation.