### 4.2 Inflation & the Consumer Price Index

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• 19. Creating a Price Index

To create a price index, first choose a base year. The index in that year is 100. The price index reflects the ratio of the price from a given year to the price in the base year. Use the formula

to find the index for a given year A. Complete the table.

• Worked-Out Solution

Begin by entering the data into a spreadsheet. Then use the given formula to complete the table.

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``` _    _     ______   _    _    __   __
| || | ||  /_   _// | \  / ||  \ \\/ //     ___
| || | ||   -| ||-  |  \/  ||   \ ` //     /   ||
| \\_/ ||   _| ||_  | .  . ||    | ||     | [] ||
\____//   /_____// |_|\/|_||    |_||      \__ ||
`---`    `-----`  `-`  `-`     `-`'       -|_||
`-`
```
• 20. Create a Line Graph

Make a double line graph of the gasoline index and the diesel index. Compare the rate of inflation for gasoline to the rate of inflation for diesel fuel.

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```  _  __     ___      _____    __   __    _____
| |/ //   / _ \\   / ____||  \ \\/ //  / ____||
| ' //   | / \ || / //---`'   \ ` //  / //---`'
| . \\   | \_/ || \ \\___      | ||   \ \\___
|_|\_\\   \___//   \_____||    |_||    \_____||
`-` --`   `---`     `----`     `-`'     `----`

```
• 21. Gasoline and Diesel Prices

For the years shown, use a spreadsheet to compare the rates of inflation for gasoline and diesel fuel to the rate of inflation indicated by the CPI.

• Worked-Out Solution

Begin by entering the data into a spreadsheet. Then calculate the percent increase from 1995 to 2009 for each of the three quantities.

From the results of the spreadsheet, you can see that both gasoline and diesel prices increased at a higher rate than the consumer price index.

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```             ___    __    __    ______    _____
___     / _ \\  \ \\ / //  /_   _//  / ____||
/   ||  / //\ \\  \ \/ //    -| ||-  / //---`'
| [] || |  ___  ||  \  //     _| ||_  \ \\___
\__ || |_||  |_||   \//     /_____//  \_____||
-|_|| `-`   `-`     `      `-----`    `----`
`-`
```
• 22. Annual Fuel Cost

Diesel engines are 30% more fuel efficient than similar-sized gasoline engines. From 2005 through 2009, would the annual fuel cost be more for a diesel engine or a similar-sized gasoline engine? Explain your reasoning.

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``` _    _     ______  __    __     ___      ____
| || | ||  /_   _// \ \\ / //   / _ \\   |  _ \\
| || | ||   -| ||-   \ \/ //   | / \ ||  | |_| ||
| \\_/ ||   _| ||_    \  //    | \_/ ||  | .  //
\____//   /_____//    \//      \___//   |_|\_\\
`---`    `-----`      `       `---`    `-` --`

```
• 23. Individual Inflation Experience

Why might the inflation rate published by the Bureau of Labor Statistics not match an individual's inflation experience?

• Worked-Out Solution

There are many reasons why an individual's experience with inflation might not match the figures published by the Bureau of Labor and Statistics. The Bureau states that "the CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included."

From this, you can see that there are many reasons why the CPI might not match your inflation experience.

• You live in a rural, not an urban area.
• You have substantial investments in stocks and bonds.
• You own your home and are not affected by changing house prices.
• You have a high income and pay high income tax rates.
• You live in a state that has high income tax rates.
• You have a costly medical condition.

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```  _  __    _____     _  _    __   __   ______
| |/ //  |  ___||  | \| ||  \ \\/ // |      \\
| ' //   | ||__    |  ' ||   \ ` //  |  --  //
| . \\   | ||__    | .  ||    | ||   |  --  \\
|_|\_\\  |_____||  |_|\_||    |_||   |______//
`-` --`  `-----`   `-` -`     `-`'   `------`

```
• 24. Effects of Inflation

Discuss the effects of inflation on an economy. Explain your reasoning.

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```__    __   __   __    _____     _____   __    __