What is the consumer price index?
Consumer Price Index (CPI) is a type of statistical method that measures the changes that have 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 raise 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 calculation can be either monthly, quarterly, or yearly depending on the country to country. It is the government’s decision to calculate CPI. It is 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 are tabulated and then the average is taken out.
Consumer Price Index Homework Help
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 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 a 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 is 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 or 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 a country’s progress and thus a helpful tool and a powerful base for many other calculations.
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