Question: The consumer price index (CPI) is a measure of the average change in prices over time in a fixed market basket of goods and services typically purchased by consumers. The CPI for all urban consumers covers about 80% of the total population. It is prepared and published by the Bureau of Labor Statistics of the Department of Labor, which measures average changes in prices of goods and services. The CPI is one way the government measures the general level of inflation- the annual percentage change in the value of this index is one way of measuring the annual inflation rate. The file titled CPI contains the monthly CPI and inflation rate for the period 2000-2005.
a. Construct a scatter plot of the CPI versus inflation for the period 2000 through 2005. Describe the relationship that appears to exist between these two variables.
b. Conduct a hypothesis test to confirm your preconception of the relationship between the CPI and the inflation rate. Use = 0.05.
c. Does it appear that the CPI and the inflation rate are measuring the same component of our economy? Support your assertion with statistical reasoning.