Question

john smith, a factory worker at an automobile plant in the city detrigan, makes $25 per hour. his dad, larry smith who retired from a plant in the same city ten years back, was earning an average of $10 per hour at the time of retirement. looking at the cpi, john concludes that a factory workers purchasing power is lower now compared to ten years ago. larry, however, does not agree that purchasing power has fallen. according to him, this conclusion cannot be drawn from such limited data.
which of the following, if true, would strengthen larrys claim that the cpi calculations are inconclusive?
○ a. the level of inflation in detrigan is expected to increase following the recent cut in interest rates.
○ b. the inflation rate in detrigan had turned negative 3 years back during a recession.
○ c. the government recently increased the weightage given to food in the cpi to reflect spending patterns.
○ d. the base year used in the calculation of the price indexes in the country has been revised every two years or so.
○ e. the basket of goods that constitute the cpi is due for its first revision in fifteen years

Explanation:

• Option A: Talks about future inflation expectations, not relevant to the inconclusiveness of past CPI calculations.
• Option B: A negative inflation rate 3 years ago is just one data - point and doesn't directly show CPI calculations are inconclusive.
• Option C: Changing the weightage of food in CPI is a normal adjustment and doesn't imply calculations are inconclusive.
• Option D: Revising the base year every two years is a standard practice and doesn't make CPI calculations inconclusive.
• Option E: If the basket of goods (which is the basis of CPI) hasn't been revised in fifteen years, it may not accurately reflect current consumption patterns. So, using such an outdated basket to calculate CPI makes the CPI - based purchasing - power conclusion (by John) unreliable, strengthening Larry's claim.

Answer:

E. The basket of goods that constitute the CPI is due for its first revision in fifteen years