Is Consumer Price Index, a good indicator of inflation?
Inflation is commonly defined as a general rise in prices caused by an increase in money supply and Credit. Now-a-days, inflation is simply seen as a rise in CPI. This is based on the logic that with more money chasing the same amount of goods and services, prices are bound to rise. To assume that more money is chasing after the same number of (relatively fewer) goods assumes that the inflation(increased money & credit) comes through on the demand side of the economy. We do not automatically get to make the assumption that it will happen that way every time. It also assumes that mroe goods have not been produced overseas by an up coming competitator, or a competitator that had its currency devalued, and so on. And can’t demand go up and down for any number of reasons? You could have inflation and yet the number of goods may increase faster than the desire to purchase them, resulting in lower consumer prices. While the upward and downward price movements in the flexible items even out,
