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CPI Adjusted Wages


I need some assistance answering the attached problem.


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Part of this question does not make sense. It states "Repeat your calculations with 0.03 reduced to 0 and 0.5 increased to 1 ." The formula in question reads ΔW/W= 0.03 +0.05 ΔCPI/CPI, not ΔW/W= 0.03 +0.5 ΔCPI/CPI. So I am thinking that this is a typo and it really means "0.05 increased to 1." However, it could also mean that the formula should in fact be ΔW/W= 0.03 +0.5 ΔCPI/CPI. I will show you how to do it both ways, but you should ask your instructor which way he or she wants the question done.

For the first part, we can find the inflation rate given by either the CPI or the GDP deflator using a spread sheet (see attached file). By dividing the change in CPI by the prior year's CPI, we ...

Solution Summary

This posting illustrates how the use of CPI based formula for raises to employee wages. How adjustments to this formula affect real wages.