Final answer:
The correct answer is A) The price index in 2006 was higher than 118.00. Indexing simplifies the interpretation of inflation rates, allowing for easier comparisons over time.
Step-by-step explanation:
If the price index in 2004 was 100, and it rose to 118 in 2005, we can calculate the inflation rate for that period. However, the statement specifies that the inflation rate between 2005 and 2006 was lower than the previous year.
The inflation rate is calculated as the percentage change in the price index from one year to the next. Using the index values, if the rate of inflation slows down, it means that while the price index for 2006 will be higher than in 2005 (reflecting inflation), the increase will be less steep than the increase from 2004 to 2005.
Therefore, the correct answer is A) The price index in 2006 was higher than 118.00, but without exceeding the rate of inflation observed in the previous year. Indexing is advantageous because it simplifies the understanding of inflation rates and comparisons over time, as opposed to dealing with absolute dollar values of goods which can be cumbersome to interpret quickly.