This annual comparison was discontinued in the 1970's. Prices for market-basket items from the various communities are averaged, the price for a specific community compared to the national average, and the ratios for all items weighted to derive an index. For a given point in time, therefore,it can be estimated that the cost of living, for example, in Americus, Georgia is 98.1 percent of the national average while the cost of living in Rockford, Illinois is 106.1 percent of the national average. If from one quarter to the next the index for Americus declines to 97.3, no conclusion can be drawn as to what is happening to price levels in Americus over time. While changing price levels are of interest because of the impact on consumer budgets, they are also indicators of general economic conditions.
Prices respond to demand.
When economic conditions are good, consumers have money to spend and will purchase from the inventory of goods and services available. In the short term, inventories are fixed, and therefore increased demand will cause prices to increase. Rising prices, within reason, are therefore an indicator of good economic times. Conversely, when times are bad demand declines and prices must be lowered to dispose of inventory. Falling prices therefore indicate bad economic times.