Consumer Price Index (CPI)

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Definition: Consumer Price Index (CPI)

Consumer price index (CPI) is metric used to measure the changes in the purchase value of a fixed set of products (like housing, groceries and other items) or services for a country or a region. Consumer price index (CPI) calculates the variations in the price level of market consortium of goods & services bought by consumers. Consumer price index is a mathematical evaluation built by regularly gathering & evaluating the prices of these goods.

Sub-indices are computed for different categories of products, with weights assigned to them reflecting their shares in the total of the consumer expenses covered by CPI. The percentage in CPI calculated annually is used to measure inflation. A Consumer price index can be used to adjust for the effect of inflation the real value of wages, pensions, and for regulating prices. The price of a representative basket of goods at wholesale stage is referred to as the Wholesale Price Index (WPI) or Producer Price Index (PPI) whereas House Price Index (HPI) is an index for measuring the changes in house prices in residential housing.


Components of Consumer Price Index (CPI)

The major components of consumer price index are:

1. Food & beverages

2. Housing

3. Transportation

4. Clothing

5. Education

6. Medical

7. Leisure

8. Other

Consumer Price Index (CPI)


Importance of Consumer Price Index (CPI)

The consumer price index is an important indicator of inflationary change. The Bureau of Labor Statistics calculates the CPI by taking a typical basket of consumer goods and services, and analysing their price and representations. The price of this year is compared to the previous year, and this helps the BLS determine how much more money one needs to buy the same stuff this year, compared to last year. The difference in the amount of money needed is likely converted into a percentage, which is the percentage inflation.

Inflation showcases the cost of living, indicated by Consumer price index which is the price ratio of a basket of goods related to consumer's daily use. This is why CPI is an appropriate measure of inflation. The economy is directly related to that basket of consumer goods, therefore, a change in CPI reflects change in economy. Consumer price index is also used to calculate real wages and pension, etc. CPI includes luxury items too mostly unaffordable for the middle class and people below. Therefore, it is not a good indicator of how the middle class and below are doing only. Weights are assigned to representative prices while calculating CPI. The inflation rates for middle class people decide how much they can afford much less goods and services other than essentials. For the lower middle class and below, the Consumer price index tells us how much they will have to struggle to survive. Implicit Price Index tells about the Inflation or deflation in an economy in comparison to the base year.


Formula for Consumer Price Index

As Consumer price index is a measure of the change in the price level of the consumer goods basket for households, its measure is done against the base market basket or the base period cost depending on the utilisation of the calculated CPI.


Consumer Price Index = (Market Basket for Particular Year / Market Basket for Base Year) x 100


CPI = (Updated Cost / Base Period Cost) x 100


Example of Consumer Price Index

In the US, several different consumer price indices are computed periodically by the Bureau of Labour Statistics (BLS). These include the

• CPI-U (for all urban consumers),

• CPI-W (for Urban Wage Earners),

• CPI-E (for the elderly), and

• C-CPI-U (chained CPI for urban consumers).,

• CPI-IW, CPI-AL

The calculation of these above indices is done by collecting data of 8000+ separate item area indices reflecting 211 category prices in 48 geographical areas. Then their weighted averages are computed. Different weights are applied to these item area indices. Thus, if consumption of chicken is more than fish or more apples and fewer strawberries than the previous month, that change would be reflected in next month's C-CPI-U. However, it would not be reflected in Consumer price index until January of the next even-numbered year. CPI-W influences the amount of SSI consumers receive.

Hence, this concludes the definition of Consumer Price Index (CPI) along with its overview.

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