in the United States could be directly affected by the weather. Also the recent oil price increases is directly related to OPEC and their choice to cut back on the production of oil. However the CPI is not a perfect measurement as Alan Greenspan, chairman of the Federal Reserve, has acknowledged. It usually overestimates the rate of inflation because the goods looked at are from previous years and do not include the addition of new products into the market. One example of this was the increase in cellular phones over in the 1990s. The Bureau of Labor Statistics was not including them in the price index simply because they didnt seem to fit into one particular category. So how does the CPI relate to some of the current events in the U.S. economy? Kathleen Madigan writes about last April when the CPI was overestimated by analysts. When the CPI jumps sharply it suggests that rate of inflation is increasing. In April of 1999 the CPI jumped a sharp 0.7 percent suggesting that inflation was on the rise. At the same time market analysts anticipated that the Federal Reserve was going to increase the interest rates at the beginning of May. Because of this combination, the Dow Jones industrial average tumbled almost 200 points. If some one who borrows money in terms of something such as a home mortgage loan suddenly encounters unexpectedly high increase in inflation, the adjusted rate (the interest rate minus the inflation rate) becomes increasingly lower. Or in simpler turns, the money that is paid back to the lenders is less and less over time. Therefore more money will be injected into the economy and the wealth transfers form the people lending the money to the people borrowing the money. At this point the Federal Reserve will have to step in and raise the interest rates once again to compensate for the inflation. It is not bad for inflation to increase at a steady rate, but when there is an unusual spike in the rate, it hur...
