Why are GDP deflator and CPI have any differences between them?

Answer 1

Simple answer:



CPI measures a basket of consumer goods.

GDP deflator measures the inflation in ALL goods in services in the economy (not just a "basket" like CPI).

Answer 2

In addition to Williegod's correct answer, note that CPI only takes account of privately purchased goods and services. If the cost of government-purchased items (e.g. warships, nurses, roads), and/or the cost of investment goods and services goes up relative to the cost of consumer items, then the GDP deflator will be higher than the CPI.

Other things being equal, though, the GDP deflator will show a (slightly) lower rate of inflation because it automatically takes into account the price elasticity of demand (e.g. if electricity prices go up faster than gas, people will use more gas and less electricity and this will be reflected directly in the GDP deflator) whereas the weightings for the CPI are only revised periodically by the country's statistics bureau, and then only on the basis of survey info, so there is an inbuilt lag between changes in consumer behaviour and changes in the weightings of the CPI.

Answer 3

The GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy.

The Consumer Price Index is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and considered a cost-of-living index.

Thus, the GDP deflator measures goods produced while the CPI measures goods consumed.