What Is It?
The Consumer Price Index (CPI) is a measurement of the average change in prices consumers pay over time for a basket of what are considered to be essential consumer goods and services.
How Is It Calculated?
A CPI is calculated based on a weighted average of a basket of consumer goods and services over time.
The CPI basket of goods and services typically includes such essentials as food, transportation, medical care, and some utilities.
A weighted average takes into account the relative importance of individual items in the basket of goods and services. For example, the price of bread (food) and the price of an automobile (transportation) may be included, but bread is purchased so much more often that its price may be multiplied (or weighted) to give it greater importance.
A base year is calculated by adding the weighted average of current prices for the goods and services. The base year calculation is then set to equal 100.0.
The CPI for subsequent years is calculated as the change in prices from the base year to the current year and is represented as a percentage above or below the base year.
What Does It Mean?
The CPI is both a measure of inflation and purchasing power of a country’s currency and therefore a country’s cost of living.
- If the CPI is rising, it means that there is inflation and a decrease in the purchasing power of the country’s currency.
- If the CPI is falling, it means that there is deflation and an increase in the purchasing power of the country’s currency.
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