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Define consumer price index:

Consumer Price Index (CPI) is a type of statistical method which measures the changes that has happened in a household’s goods and services over a period of time. They take price into consideration and measure the changes that have taken place during that course of time. It is basically done to find out the changes in the lifestyle of the people and also to understand the cost of living in an economy.

It gives a clear picture of the Inflation rate as well. It is obvious that if the prices are going to rise inflation is creeping in and thus for that purpose CPI is calculated. While calculating CPI various household goods and services are taken into consideration according to their importance and their CPI is calculated.

This is calculation can be either monthly, quarterly or yearly depending from country to country. It is the governments’ decisions to calculate CPI. It is a very helpful data with reference to prices and the rate of inflation in the economy.

It gives a correct idea of the standard of living as well as the cost of living in the country. CPI is calculated on the basis of average and means which is tabulated and then the average is taken out.

To calculate CPI the following formula is used:

CPI2/CPI1 = Price2/Price1

1 indicates the comparison year which is normally 100.

The calculations normally give a rough idea of the inflation or deflation during a certain period of time. It may be inferred that if the prices rise in a short span of time it is the situation of Inflation and if the prices of the commodities fall during a short span of time it is said to be a Deflation situation. CPI is always associated with the prices and the cost of living in any country. A high CPI means the prices are rising and the standard of living as well.

CPI is the most common and frequently used method to calculate the Inflation or Deflation rate. CPI normally gives an idea of the value of money which may be in form of salary, wages, pensions etc.

The commodities that are taken into consideration while calculating CPI are:

  • Food
  • Shelter
  • Medicines
  • Electricity
  • Transportation
  • Vegetables
  • Milk and Milk Products
  • Fuels (Oil, Petrol, Diesel, Kerosene etc)

The above-mentioned items are taken into consideration while calculating the rise of fall in the prices of the products. Normally it is on the higher side indicating that inflation has crept in but sometimes the prices fall indicating deflation.

Thus CPI is a very good indicator showing country’s progress and thus a helpful tool and a powerful base to many other calculations.

Consumer Price Index Homework Help