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consumer price index (CPI)
for any period, measures the cost in that period of a standard basket of goods and services relative to the base year
a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year
rate of inflation
the annual percentage rate of change in the price level as measured, for example, by the CPI
a situation in which the prices of most goods and services are falling over time so that inflation is negative
deflating (a nominal quantity)
the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms
the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in specific price index
when the rate of inflation turns out to be roughly what most people had expected
when the rate of inflation turns out to be substantially different from what most people had expected
the tendency for nominal interest rates to be high when inflation is high and low when inflation is low
quality adjustment bias
increase in the CPI that is due to the reluctance of government statisticians to make quality adjustments as large as some economist think appropriate
ignoring the fact that consumers can switch from more expensive to less expensive goods, leading to overestimates of the true increase in the cost to consumers of achieving a given level of utility or consumer satisfaction
the overall level of prices at a point in time as measured by a price index such as the CPI
the price of a specific good or service in comparison to the prices of other goods and services
price signal distortion hypothesis
the claim that any substantial amount of change in the price level will make it difficult for market participants to interpret the extent to which price changes involve relative price changes
downward nominal wage rigidity hypothesis
the claim that low levels of inflation will reduce efficiency because real wage cuts will then typically require nominal wage cuts, which will be resisted
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