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### Course: Finance and capital markets>Unit 3

Lesson 1: Inflation basics

# CPI index

The consumer price index (CPI) is a measure used to calculation inflation. Learn about how the CPI is calculated, what it measures, and how it is used to track inflation in this video. Created by Sal Khan.

## Want to join the conversation?

• "sale of homes is the transfer of wealth from one generation to another" doesn't sound like moral or correct in our system. How can I understand this?
• I think he means the process of people ageing, choosing to downsize, or going into care homes, etc and therefore cashing in their properties, and typically the buyer ends up being a younger person starting out on the property ladder. The inflation in homes prices, means higher housing prices, so the argument is it transfers wealth to the seller. I dont think there's a moral component at play.
• What is impacted if inflation is understated?
• The thing that is often impacted is consumer confidence.

Let's say you are a programmer analyst and earned a \$51,000 salary last year. The next year you receive a salary increase and received a salary of \$53,000; however, inflation increased to 8% from last year. If you do not realize that inflation increased, you might believe you actually received a salary raise and start spending it faster (consumer confidence)

However you are now actually receiving a lower salary than last year,
\$51,000 * .08 = 4,080 This number means how much your next year salary has to increase to EQUAL your last year salary.

51,000 + 4,080 = \$55,080
So \$55,080 next year is the same as \$51,000 last year.

Since the next year you only received \$53,000, you lost -2,080 from your last year salary.
53,000 - 55,080 = -2,080

In the end you ended earning less and believed that you had more money than last year :-(

By the way, 8% would be a HUGE inflation rate in the USA I only used it as an example (but it IS possible)
• In this video Sal states that the CPI number should have been higher during the housing boom, but I think that number stayed artificially low because of the mortgage programs that people were signing up for. If you have a home and the borrower gets a mortgage for \$300,000 and the purchaser received a 30 year fixed mortgage at 5.5% his payment would be \$1,703. This is what you would have traditionally seen. However, with all the new programs that were available a borrower could have received an interest only mortgage on a home for \$400,000 and paid only \$1,833. A difference of only \$130 for a mortgage that is much larger. Wouldn't that continue to keep the CPI down artificially?
• is cpi better than wpi to calculate inflation?
• Wouldn't it be better the way it was represented instead of the "real" inflation numbers? Should't the understated versions of inflation have a positive impact on the people who bought homes at that time?
• Do you have anything on the chained vs. unchained CPI?
• I thought CPI didn't include housing costs?