Question

If CPI is lower in the current year than it was in the base year, which of the following has occurred?

1) Inflation has decreased
2) Inflation has increased
3) Inflation has remained the same
4) Cannot be determined

Answer 1

The Consumer Price Index (CPI) being lower in the current year compared to the base year means that inflation has decreased. The CPI measures changes in the price level of consumer goods and services, and a decrease indicates a fall in the inflation rate.

Step-by-step explanation:

If the Consumer Price Index (CPI) is lower in the current year than it was in the base year, it indicates that inflation has decreased. Inflation is defined as the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. A price index, such as the CPI, measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The term 'base year' refers to the year that serves as a comparison point for price levels in other years, with the CPI set to 100 during this period.

Considering historical data, the CPI often rises between 2% to 4% per year, reflecting modest inflation. However, when the CPI decreases, it signifies a reduction in inflation rates – meaning on average, prices have not risen as quickly, or may have even fallen, reflecting a decrease in the overall rate of inflation.