Definition
The Consumer Price Index (CPI) is a comprehensive measure used to track changes in the average price level of a predetermined basket of goods and services purchased by households over time. It serves as a primary indicator of inflation in an economy, reflecting price changes at the consumer level. The CPI is calculated and published monthly by government agencies, such as the U.S. Bureau of Labor Statistics (BLS), which tracks expenditures on categories like housing, food, transportation, healthcare, and entertainment.
Key Points:
- Market Basket: The selection of goods and services used to calculate the CPI represents typical consumption patterns for urban households.
- Base Period: A designated time period against which current prices are compared. The base period typically has an index value of 100.
- Price Collection: Prices are gathered from various locations, including retail stores, services establishments, rental units, and healthcare providers.
- Adjustments: Seasonal adjustments are often utilized to remove the effects of periodic fluctuations, enabling more accurate month-to-month comparisons.
Examples
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January 2016 CPI Example: In January 2016, the CPI was recorded at 236.916. Relative to the base period of 1982–1984 (CPI = 100), this means that the general price level increased by 136.916%.
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Monthly Variation: Suppose the CPI in June was 260 and in July increased to 262. This rise indicates a monthly inflation rate, calculated as \[(262-260)/260\] * 100 = \[~0.77%\].
FAQs
Q1: How is the CPI used in real-world applications? A1: The CPI is used to adjust wages, pensions, and social security benefits for changes in living costs. It also guides policymakers in making economic decisions and setting interest rates.
Q2: Does CPI reflect the cost of living accurately? A2: While CPI is a broadly accurate measure, it might not reflect individual experiences due to its generalized market basket and average pricing.
Q3: Why are certain goods and services included or excluded in the CPI market basket? A3: Inclusion is based on significant consumption by households, regularly updated to represent current spending habits. Some items are excluded due to infrequent purchase or difficulty in price tracking.
Q4: Is the CPI the same as inflation? A4: CPI is one measure of inflation, focusing on consumer prices. There are other measures like the Producer Price Index (PPI) and the Personal Consumption Expenditures (PCE) price index.
Related Terms
- Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
- Producer Price Index (PPI): Measures the average change over time in the selling prices received by domestic producers.
- Cost-of-Living Index (COLI): Another measure accounting for substitution effects in the consumption of goods and services.
- Base Period: The time period against which all subsequent time periods are compared in an index.
- Core CPI: Excludes food and energy prices due to their volatility, providing a clearer view of long-term price trends.
Online Resources
- Bureau of Labor Statistics - CPI
- Investopedia - Consumer Price Index (CPI)
- Federal Reserve Education - Inflation and CPI
References
- U.S. Bureau of Labor Statistics. (n.d.). Consumer Price Index (CPI) - Detailed Report. Retrieved from https://www.bls.gov/cpi/
- Mishkin, F. S. (2015). The Economics of Money, Banking and Financial Markets. Boston, MA: Pearson.
Suggested Books for Further Studies
- “The Economics of Inflation: A Study of Currency Depreciation in Post War Germany” by Costantino Bresciani-Turroni
- “Principles of Economics” by N. Gregory Mankiw
- “Macroeconomics” by Paul Krugman and Robin Wells
- “Statistics for Business and Economics” by Paul Newbold, William L. Carlson, and Betty Thorne
