A national government raises its value-added tax (VAT), a type of consumption tax, from 10% to 12% on all goods and services. Assuming producers do not change their pre-tax prices and consumer buying habits remain the same, what is the direct and immediate impact of this policy change on the nation's Consumer Price Index (CPI)?

An economist observes that a country's official inflation rate, as measured by the year-over-year change in the CPI, suddenly jumped from 2% to 5% in a single month, while producer price indexes remained stable. Which of the following events provides the most plausible explanation for this discrepancy?

Policy Impact on Price Index Measurement

To accurately measure underlying price inflation without the influence of fiscal policy, the Consumer Price Index (CPI) is calculated using the pre-tax prices of goods and services.

Tax Policy Impact on Price Index