What is Consumer Price Index (CPI)? How is CPI calculated?

CPI stands for Consumer Price Index. It is an index which measures the changes in the price level of consumer goods and services purchased by households. 

A consumer should be a representative sample taken randomly so that the whole population is a good representation of the nation.

The objective of the index is to measure the change of prices of goods and services. It can be used as an economic indicator, a means of adjusting currency values, and a deflator of other economic series.

US CPIData source: usinflationcalculator.com.

According to Cambridge Dictionaries Online, the Consumer Price Index is:

“A list of the prices of basic goods and services, showing how they change in a particular period of time, as a way of measuring inflation.”



 

Calculating Consumer Price Index:

For a single item: 

Current item price ($) = (base year price) * (Current CPI) / (Base year CPI)

For multiple items:

CPI formula

What’s the difference between inflation and CPI?

Inflation refers to how much prices have gone up by over a specific period, which is usually annually, monthly, quarterly or half-yearly. CPI refers to just an index, an instant in time.

The inflation rate for one year, for example, is the Current CPI minus the Previous CPI, divided by the Previous CPI, and then multiplied by 100.

Here is an example:

– Imagine the CPI today is 165.
– Imagine the CPI exactly one year ago (previous CPI) was 150.

The formula is: (165 – 150) ÷ 150 x 100 = 10%. Inflation is 10%.

Bear in mind that by using this formula, you would only know what the inflation rate is for households. The CPI does not take into account ALL prices in an economy, such as how much factories might be paying for raw materials.

The Retail Prices Index

The United Kingdom used to measure consumer inflation with the RPI or Retail Prices Index. However, the RPI was not found to meet international standards.

In 2013, the UK’s ONS (Office for National Statistics) announced that it would no longer classify RPI as a ‘national statistic’, opting for the Consumer Price Index instead.

Video – What is the CPI?