Question

Explain why the change in CPI doesn't necessarily reflect the change in prices of necessarities and who this is likely yo impact upon the most.

Answer 1

CPI is the abbreviated form of Consumer Price Index. It is the concept of measuring the weighted average of the prices of all types of products. It also helps to determine the demand and the supply of the goods at the particular period of time. But in some critical circumstances, the change in CPI has its effect in the change in prices of necessaries. Let us discuss this effect briefly by the following points. In time of economic crisis, when demand for the basic goods and services reduced to certain extent because of two main reason. Increase in inflation through predicted measure of CPI and decreasing trend of purchasing ability of the people due to availability of low income. As a result the demand and supply of the essential goods leads to reduce to very bottom level. This in turn cut shorts the production level of basic goods which are consumed by all set of people in order to fulfill the day to day basic requirements. So the firms fixes the prices of the necessities to very high level because they need to cover the cost of production expenses with the limited number of products they prepared for sale as the public goods. This was considered as the disastrous effect of CPI on abnormal changes in prices of basic consumable goods by the public for their daily use.

The change in the price of basic goods mostly have impact on the purchasing ability of the lower middle class people in the society. CPI not only considers the factor of economic crisis and also the inequalities in the distribution of wealth in the society. The change in the basic price of the basic goods will not affect the purchasing ability of the Upper middle class people and the economically sound people. They will not restrict them to buy the goods even the price was rose to sky level. Their savings and income will help them to procure them in all period. But in the contrary, the lower middle class people and very poor people with less economic status are even unable to feed their children at time when the price of the products rose to very high level. Their level of low income and less savings also determines the such evil impact on them. The mentioned facts are proves that the change in the prices of basic goods impact on the poor people in the society.