# Consumer Price Index (CPI)

Question and Definition

1. What is CPI? Consumer Price Index (CPI): A measure of the price level based on the consumption pattern of a typical consumer.

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2. How to calculate it? 3. The concerns that are caused by it?

Consumer Price Index

• Consumer Price Index (CPI): A measure of the price level based on the consumption pattern of a typical consumer.

• Goal: Measure the cost of living.

• Calculated by the Bureau of Labor Statistics (BLS).

• The weights are based on the spending patterns of a typical consumer in the United States.

Computing the CPI

• Calculating the price index:

• Using the price levels, we can find inflation with the percentage change formula:

𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥 =   𝑏𝑎𝑠𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒

𝑏𝑎𝑠𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 × 100

𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 =   𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥1 − 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥0

𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥0

Computing the CPI

Computing the CPI Consider the previous figure. There are three goods, each given a price and quantity. • Cost in this case is the total amount of money expended on the item.

Given a base year of 2016, we purchased some goods and spent \$40. • We purchased the same goods in 2017, and we spent a total of \$44 for the same goods. • To create an index, we use our base year and give it an index of 100 as a figure to compare other years to. • To get the index for the other years, we divide the basket price in the new year divided by the basket price in

the base year.

When we multiply by 100 here this does not convert the number to a percentage; it simply indexes the price level. • Inflation is equal to 10%.

CPI and Inflation in the Long Run (1965–2018)

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