What is the Consumer Price Index CPI?

The Consumer Price Index (CPI) is a measure of the average change in prices paid by consumers for a basket of goods and services. The CPI is used to calculate inflation, which is the rate at which the prices of goods and services rise over time. The CPI is released monthly by the Bureau of Labor Statistics (BLS). It is one of the most closely watched economic indicators, as it can have a significant impact on economic conditions and monetary policy.

How is the CPI market based determined?

The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. So, there is a time lag between the expenditure survey and its use in the CPI.

CPI Formula

The Consumer Price Index (CPI) is a measure of the average change in prices paid by consumers for a basket of goods and services. The CPI is used to calculate inflation. The CPI formula is:

CPI = (Price of goods in current period / Price of goods in base period) x 100

where the price of goods is the weighted average of prices for all goods and services in the CPI basket.

The CPI measures the average change in prices for a fixed basket of goods and services from one period to another. Hence, The fixed basket is representative of consumption by urban households.

What categories comprise the CPI?

The CPI includes six categories:

Food and beverage
Housing
Apparel
Transportation
Medical care, and
Recreation.

Each category is further divided into subcategories. For example, the food and beverage category includes food at home and food away from home.

Limitations of CPI

CPI does not take quality into account. This is a big problem, especially with electronics. A new TV might cost twice as much as an old one, but it will also be much better quality.

CPI is based on the prices of a fixed “basket” of goods and services. The basket is designed to represent the typical consumption habits of a “typical” urban consumer. But what if the basket doesn’t match your consumption habits?

The CPI basket includes things that people have to buy, like food and housing. But it also includes things that people choose to buy, like entertainment and vacations. Furthermore, an increase in the price of housing will have a bigger impact on CPI than an increase in the price of tickets to a baseball game. Thus, this means that CPI might not be a good measure of how much prices have changed for you personally.