CPI

If the CPI rises from 300 to 309 over a year, the inflation rate is:

1. A.3%Correct - change / starting level.
2. B.1.03%This is 309 divided by 300, the growth factor of 1.03 read as a percentage. Subtracting one from that factor, or dividing the 9-point change by the starting index, gives 3%.
3. C.9%This reports the 9-point move in the index as though points were percent. An index change must be divided by the level it started from, and 9 out of 300 is 3%.
4. D.2.9%This divides the 9-point increase by the ending level of 309 rather than the beginning level. Rates of change are always measured against the starting point, which produces 3%.

Why: (309 - 300) / 300 = 3%.

The primary measure of inflation for U.S. consumers is:

1. A.The unemployment rateUnemployment measures slack in the labor market, not the price level, and the two can move in the same direction or opposite ones. Inflation is tracked by a price index.
2. B.GDPGDP measures the quantity of output an economy produces. There is a price measure embedded in the GDP deflator, but the headline figure quoted for consumer inflation is the CPI.
3. C.The Consumer Price Index (CPI)Correct - the standard consumer inflation gauge.
4. D.The federal funds rateThe federal funds rate is a policy lever the Fed adjusts in response to inflation, not a measurement of it. Confusing the thermostat with the thermometer is the error here.

Why: The Consumer Price Index (CPI) tracks the price of a basket of consumer goods and services.