The Consumer Price Index: A Way to Compare Prices in Different Years

THE CONSUMER PRICE INDEX

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The Bureau of Labor Statistics reports the CPI each month. It is used to monitor changes in the cost of living over time

FYI: Whats in the CPIs Basket?

16% Food and beverages

17% Transportation

41% Housing

Education and communication

6% 6% 6% 4% 4%

Medical care

Recreation

Apparel

Other goods and services

How the Consumer Price Index Is Calculated

1. Fix the basket. Determine what prices are most important to the typical consumer. 2. Find the prices. 3. Compute the baskets cost. 4.Choose a base year and compute the index. Designate one year as the base year, making it the benchmark against which other years are compared. Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.

CPI formula

Price of basket of goods and services 100 Consumer price index = Price of basket in base year

How can you use CPI

To assess the economic landscape and primarily inflation. Calculate consumer income Social security Federal pension benefits Food stamp benefits

Limitation of CPI
1) Coverage is limited 2) Only covers Urban Centres. 3) Prices may have different trend in rural & urban centres. 4) Rent is computed through construction input items index instead of rent survey. 5) It measures partially inflation not total consumers expenditure.