Fixed basket versus flexible basket dynamic

Reference no: EM133339807

Case: Consumer Price Index: This metric incorporates only the 211 most commonly purchased items by the average urban family of four. It is what we call a fixed basket metric. That is, it looks at the same basket of goods and estimates how the cost of purchasing that basket has changed over time. PCE Chain-Type Price Index: This metric incorporates everything in the consumption component of GDP. The use of chain-weighting means that this is a flexible basket metric. That is, it allows for the substitution between baskets items over time. Compare the percent change from a year ago views of these measures. How you plot the data is your choice.

Question: What is the general relationship between inflation as measured by CPI versus PCE?

Question: How might the fixed basket versus flexible basket dynamic lead to this general relationship?

Question: In periods of high inflation (like today and in the 1970s), how does this relationship evolve? Does this reinforce your explanation above?

Reference no: EM133339807

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