What Is The Consumer Price Index (CPI)?

Definition of Consumer Price Index (CPI)

First Published: AdawnJournal.com April 7, 2010

Something that is very important for the economy, but which a lot of people do not understand, nor know about, is the Consumer Price Index. The Consumer Price Index is important because it provides a measure of the average price of consumer goods and services from one period to a next within a city, region or country.

As can be expected, this gives an indication of how much people are paying for goods and services. The more people have to pay for goods and services, the worse the economy is generally doing because of the rate of inflation. Inflation is typically higher when the economy is doing poor, which influences the Consumer Price Index.

The Consumer Price Index is determined by measuring the price of a group of goods, which would represent the typical purchases of a consumer. In addition, the Consumer Price Index can be used to index things like wages, pensions and salaries. For economists, watching the Consumer Price Index along with the census of the country is very important for determining national economic statistics.

In the past, the Consumer Price Index of the United States has provided a good indication of the strength of the economy. From 1971 to 1977, the Consumer Price Index of the United States increased by an astounding 47 percent, showing the rapid inflation that was happening at the time. In 2009, the Consumer Price Index actually fell for the first time in over 50 years, dating back to 1955.

In Canada, prices are measured against a base year to find the Consumer Price Index. Currently, the base year is 2002 and the value for the 2002 basket of goods is 100.  In 2008, the Consumer Price Index had reached 114.1 – this simply means that what would cost $100 in 2002 cost $114.10 in 2008.

Two pieces of data are needed to create the Consumer Price Index; price data and weighting data. Price data is the collection of the goods and services from a few retail stores at a certain time and in various locations. So, this could be getting the price of bananas from four different grocery stores in three different cities in the American Northeast. Weighting data is the estimate of the shares of different types of expense data as a fraction of total expenses covered by the index. This information usually comes from sample decades and sample homes.

Of course, there are limitations to the Consumer Price Index. For one, consumer expenses done in foreign countries are not done, as well rural populations are often not included. As well, the very rich and very poor are often excluded as sample groups. Something that is always excluded is savings and investments, but the cost of financial services is included, as is insurance.

Everything will be weighted differently within the Consumer Price Index as well. For example, on 100,000 items from 20,000 stores and 30,000 rental outlets will be brought together and averaged out so that Housing accounts for 41.4 percent, Food and Beverages at 17.4 percent, Transport at 17 percent, Medical Care at 6.9 percent, Misc. at 6.9 percent, Apparel at six percent and Entertainment at 4.4 percent.

The Consumer Price Index is not something most people will think about, but it gives them a good indication of how their country’s economy is doing.

Australia Travel Blog: The Blue Mountains

Sydney Travel Blog: Part 9 – Blue Mountains’ Stunning Natural Beauty

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Australia Travel Blog: Sydney City Tour

Day 2 of my tour started right on time when the big, double-decker bus arrived just before 7:25 pick-up time. Today I will be vising the Blue Mountains, which is the main attraction, and then the Featherdale Wildlife Park.

The Blue Mountains are situated within a World Heritage Area and offers spectacular stunning natural beauty. A 140-kilometer walking trail, native bushland, ancient rock formations, long stretches of eucalyptus trees, underground caves, cliffs, canyons, waterfalls, and much more can be found in the Blue Mountains.

The Blue Mountains area has any facility you can think of to welcome tourists. For example, it offers glass-topped railway carriages to ride into the depths of the lush, hidden valley below. This is the steepest incline railway in the world.

There is a cableway offering panoramic views and the skyway that glides between cliff tops. You will watch breathtaking views 270 metres above ancient ravines and the rainforest canopy.

There is another valley floor boardwalk which is goes under a canopy of tall tree ferns.

The Blue Mountains area also has a picnic area, resort, street art walk, restaurants and so much more.

However, due to limited time, I would not able to see anything else beyond what’s already included in the tour.

Before reaching the Blue Mountains, we will stop at a quaint mountain village called Leura. It would take about 2 hours to reach the Blue Mountains. Tiny mountain hamlet Leura was very close to the Blue Mountains.

How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.

How the Loonie Affects the Canadian Economy

How Strong Canadian Dollar Affects Economy

First Published: ADawnJournal.com April 11, 2010

If you ask a Canadian what the dollar is at, they will probably tell you that it is near the American dollar in value. Most Canadians know where the dollar sits, and that when the dollar is good, so is the economy. However, many citizens do not truly understand just how important the Canadian dollar, or Loonie, is to our economy. So, let’s learn about the Canadian dollar and its effect on the Canadian economy.

For much of the 1990s, the Canadian dollar was well below the American dollar, often hovering around 65 cents. Things were at their worst on January 21, 2002, when the Canadian dollar hit 61.79 cents. From there, things began to improve and the Canadian dollar began to gain immense value, roughly 70 percent, within a few years. By September 20, 2007, the Canadian dollar did something it had not done in 31 years; it reached parity with the American dollar.

During the 1970s, the Canadian dollar was worth more than the American dollar, specifically in the years 1972, 1974 and 1976. On April 25, 1974, the Canadian dollar was actually worth four cents more than the American dollar. In August of 1957, the dollar was worth six cents more than the American dollar.

Typically the Canadian dollar will do better when commodity prices are higher. We have many resources, so when resources are more expensive, we make more money. Some of the resources that we have which are the most valuable are oil, copper, gold and wheat. When the price for goods and services increases, the value of the dollar also goes up, along with the Canadian economy. What does this mean for the Canadian economy then?

Well, when our dollar is at par with the American dollar, which means that goods in the United States are 60 percent cheaper than they were in 2002. This means that we can buy items in the United States for much less, and the government can then import items from the United States for less. For Canadian investors, things are not as good because the gains in the Canadian dollar wipe out the gains they have enjoyed. For example, when the Canadian dollar rose to par with the American dollar, the Dow Jones had enjoyed an 11 percent increase since the beginning of the year. In contrast, the Canadian dollar went up 23 percent in that same time period, thereby eliminating the gains felt by Canadian investors.

While it is cheaper to import goods from the United States, it is much more expensive to export goods, which makes Canadian exporters hurt. American companies are not coming up here as much because it is now more expensive to do business. Between 2002 and 2007, 250,000 manufacturing jobs were lost as a result of this surging dollar.

As we can see, there is a flip side to all of this. When the Canadian dollar is down, it costs more to import but more American businesses are funneling money into Canada because it is cheaper. In contrast, when the Canadian dollar is up, it is cheaper to buy from the states but exportation of our goods is more expensive which means less American companies buying from Canada.

Is It Our Last Chance To Avoid Getting Hit By High Interest Mortgage Rates?

High Interest Rates And How To Avoid Getting Hit By Them

First Published: April 15, 2010 ADawnJournal.com

The biggest concern for anyone currently looking for a mortgage to buy residential property is the volatility of the market. In the last couple of years, interest rates have fallen not just in Canada but all over the world as the financial situation leads to predictions of dire hardship. However, the measures in place to prevent a total and catastrophic meltdown (and however bad things are at the moment, the word “catastrophic” must be saved for situations that require a completely fresh start rather than a shifting of the boundaries) mean that, after a period of negative financial performance of the kind which we have seen recently, there will inevitably be a period of stabilization and then a recovery of sorts.

The outcome of this is that there is a narrow window, which is getting narrower as time passes, for anyone who has found themselves “recession-proof” to take advantage of the cuts in interest rates before the period of recovery kicks in and, inevitably, interest rates begin to rise again. The lessons of the past years have had the effect of encouraging us all to be a bit more careful, and any rise in rates will be gradual. But there seems to be very little doubt among market experts at the present time as to the feeling that rates will rise, and in five years’ time they will be higher than they currently are. Anyone hanging on to see how far the present rates drop may be disappointed.

High interest rates are used as an economic tool by governments and banks to control excessive market optimism. A few years ago the world in general was in a period of “boom” which was largely the mirror image of the “bust” in which it now finds itself. At that point, interest rates were rising and individuals hoping to get involved in real estate felt that they were being frozen out by “prohibitive” interest rates. Without the factual data, taken over a period of time, to prove a substantive change in the way the world sees economic issues, it is impossible to say how high interest rates may one day rise. If you are in a sound borrowing position, and if you are likely to be in a good situation to maintain your repayments going forward, now is the time to borrow for a house purchase. There may never be a better one.

Those who believe that there is scope for a further drop in interest rates would not currently be well served by waiting for it. It may come, it may not. More likely it will not, but if you like the odds it would at least be worth borrowing on a variable rate mortgage which will drop its rate as the banks drop theirs and rise when the banks do likewise. After five years, the terms of the mortgage can be renegotiated, and people with a good variable rate mortgage will be in the best position to do so.