[kənˈsjuːmə(r) praɪs ˈɪndeks]
CPI stands for Consumer Price Index, which is a measure of the average change in prices over time of goods and services purchased by households.
What is Consumer Price Index (CPI)?
CPI, or the Consumer Price Index, is a tool that economists and policymakers use to measure how expensive it is for people to buy things over time. It does this by looking at the prices of a fixed “basket” of goods and services, which represent what an average consumer would buy. The basket includes things like food, housing, transportation, and healthcare. By comparing the prices of these items over time, CPI gives us a sense of how much the overall cost of living is changing.
The CPI is used as a key measure of inflation, which is the rate at which the general level of prices for goods and services is rising. It is commonly used by governments, central banks, and businesses to adjust policies, contracts, and other agreements that are tied to the rate of inflation.
Key Takeaways
- CPI is a measure of inflation: CPI is one of the key tools used to measure inflation, which is the rate at which the general level of prices for goods and services is rising.
- CPI tracks a “basket” of goods and services: The CPI measures the price changes of a fixed basket of goods and services that are commonly purchased by households, such as food, housing, clothing, transportation, medical care, and entertainment.
- CPI is calculated over time: The prices of the items in the basket are tracked over time, and the percentage change in their prices is used to calculate the CPI.
- CPI is used to adjust policies and agreements: CPI is commonly used by governments, central banks, and businesses to adjust policies, contracts, and other agreements that are tied to the rate of inflation.
- CPI can affect wages and interest rates: Because CPI is used as a measure of inflation, it can have important implications for things like wages and interest rates.
Example of Consumer Price Index (CPI)?
The “basket” for the CPI includes only one item, which is gasoline. In January, the price of gasoline was $2.50 per gallon. In February, the price had increased to $2.75 per gallon.
To calculate the percentage change in the price of gasoline, we can use the formula:
((New Price – Old Price) / Old Price) x 100%
Plugging in the numbers, we get:
((2.75 – 2.50) / 2.50) x 100% = 10%
So the CPI for February has increased by 10% compared to January, due to the increase in the price of gasoline. This means that the cost of the “basket” of goods and services, which includes only gasoline in this case, has gone up by 10% over the past month.
Back to Glossary.
