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Chapter 20: Problem 7

The headline on an article in the Wall Street Journal was "Why Ice Cream Is More Important Than Bacon When Tracking Inflation." Considering how the CPI is constructed, why would ice cream be more important than bacon in calculating inflation?

Short Answer

Expert verified
Ice cream is more important than bacon in calculating inflation because it's likely consumed in higher quantities, and thus has a higher weight in the CPI basket. An increase in the price of items with a high weight like ice cream would significantly influence the overall CPI and hence the rate of inflation. The more a good is consumed, the greater its influence on inflation.

Step by step solution

01

Understand the CPI

CPI is a measure used to determine inflation and it includes a basket of goods and services purchased for consumption by households. The weights assigned to these goods are generally proportional to the average expenditure on these items by the households. Items that are purchased more frequently or in larger quantities have higher weights.
02

Comparison between Ice cream and Bacon

Given that the article suggests ice cream is more important than bacon in tracking inflation, one can infer that the average consumption of ice cream is likely higher than that of bacon. Because the more a product is consumed by households, the more it will impact the CPI.
03

Relation to Inflation

Inflation is the rate at which the general level of prices for goods and services is rising. So, if the prices of goods or services with higher weights (like ice cream) increase, they will significantly contribute to the overall CPI and hence the rate of inflation.

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