(Drew: for next week I want you to do something different)
The exact level of inflation is an important piece of economic data because it is used to determine the cost-of-living adjustments for social security, pension payments, labor contracts, federal employees, and military personnel.
Look at the data for the Producer Price Index, the Consumer Price Index, the GDP Deflator and core inflation for the last 20 years. You can get the price indexes data at: http://research.stlouisfed.org/fred2/ and the core information from: http://data.bls.gov/cgi-bin/surveymost?cu. Read about core inflation definitions in Todd Clarke's "Comparing Measures of Core Inflation": www.kc.frb.org/publicat/econrev/PDF/2q01clar.pdf
Now please answer the following questions:
1.Do all of these measures indicate the same pattern of inflation in the same time period?
2. Explain why some indexes provide a difference of when inflation is occurring.
3. Explain which index you would want to adjust your wages and salary and why.
4. Explain which index you would select to use to adjust your employees' wages and why.
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