A common measure of the price level in the United States is

A common measure of the price level in the United States is the Consumer PriceIndex (CPI). The index had the following value in January of each of the following years

(a) Compute the 20-year ination rate (i.e. the percentage change) between 1955 and 1975, 1975 and 1995, and 1995 and 2015.1

(b) During which 20 year period was the dollar the best store of value? Why?

Solution

A)

Inflation rate(between 1955-1975) is calculated as:

(CPI₁₉₇₅ - CPI₁₉₅₅)/ CPI₁₉₅₅

(52.30-26.77)/26.77 = 0.9536 or 95.36%

Inflation rate(between 1975-1995) is calculated as:

(CPI₁₉₉₅ - CPI₁₉₇₅)/ CPI₁₉₇₅

(150.50-52.30)/52.30 = 1.877 or 187.7%

Inflation rate(between 1995-2015) is calculated as:

(CPI₂₀₁₅- CPI₁₉₉₅)/ CPI₁₉₉₅

(234.68-150.50)/150.50 = 0.5593 or 55.93%

B) Higher the inflation higher is the prices of goods and services. Therefore every dollar buys lesser amount of goods and services. Hence,

Between 1995-2015 the dollar was the best store of value as the inflation during this period is the least.