A daily indexed unit of account or Daily

Consumer Price Index A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...

(Daily CPI) can be used in contracts or in the Capital Maintenance in Units of Constant

Purchasing Power Purchasing power refers to the amount of products and services available for purchase with a certain currency unit. For example, if you took one unit of cash to a store in the 1950s, you could buy more products than you could now, showing that th ...

accounting model, to ensure that deferred payments and constant real value non-monetary items are indexed to the general price level in terms of a Daily Index. This is done so that the real value of these items is not affected by changes in the

inflation rate In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

(in the case of monetary items) or by the stable measuring unit assumption (in the case of constant real value non-monetary items). Non-indexed units, such as contracts written in nominal currency units and nominal monetary items, incur inflation or deflation risk in the case of monetary items. During all periods of

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

, the debtor pays less in real terms than what both the debtor and creditor agreed at the original time of the contract or sale. On the other hand, in periods of

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...

, the debtor pays more in real terms than the original agreed value. The opposite is true for creditors. Contracts and constant real value non-monetary items accounted in daily indexed units of account, Daily CPI or monetized daily indexed units of account incur no inflation or deflation risk, as the real value of payments and outstanding capital amounts remain constant over time while the nominal values are inflation- or deflation-indexed daily. Indexation is typically achieved by adjusting payments and outstanding capital as well as interest values using a Daily

consumer price index A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...

or a monetized daily indexed unit of account. A monetized daily indexed unit of account, called the

Unidad de Fomento The Unidades de Fomento (UF) is a unit of account. It is a non-circulating currency; the exchange rate between the UF and the Unidades de Fomento is constantly adjusted for inflation so that the purchasing power of the Unidad de Fomento remains ...

was introduced in Chile in 1967, but it was only in the early 1980s that it was widely adopted by both the Chilean people and the Chilean government. Its original base value has never been changed. By 1983, over 60 percent of total bank loans in Chile were written in the UF. which eliminated the effect of inflation during inflation. The value of the UF in pesos is published daily in all major Chilean newspapers and on government websites. Initial doubts about the Chilean governments ability to adopt inflation targeting under such an indexed financial system proved unfounded as the Central Bank of Chile has successfully maintained low inflation rates since 1998. In 1848,

John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, politician and civil servant. One of the most influential thinkers in the history of liberalism and social liberalism, he contributed widely to s ...

discussed the inflation risk of non-indexed units of accounts. He stated that "All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious." In 1887

William Stanley Jevons William Stanley Jevons (; 1 September 1835 – 13 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method i ...

referred to previous authors and discussed an indexed unit of account which he calls a "tabular standard of value". In 1887

Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist and one of the most influential economists of his time. His book ''Principles of Economics (Marshall), Principles of Economics'' (1890) was the dominant economic textboo ...

, also referring to previous authors, discussed a similar proposal. In 1998 and onwards,

Robert Shiller Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2022, he served as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center fo ...

similarly argued for the introduction of an indexed unit of account into the United States economy as a means of eliminating inflation risk.

Notes

{{DEFAULTSORT:Indexed Unit Of Account Inflation

See also

Notes