Consumer Price Index

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Consumer Price Index

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Introduction

• CPI refers to an indicator of price variation in
  the prices of consumer goods.
• This is as well as services that are bought by
  households.
• CPI measures changes in the price levels of
  services and goods that people in a country
  purchase over time.

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Consumer Price Index (CPI)

• It examines the average price of the consumer
  basket of goods bought and the services hired by
  consumers .
• These include medical care and transportation.
• It is calculated by averaging changes in the
  price of items in predetermined baskets.
• Changes in consumer price index is important.
• It helps countries in assessing changes in price
  that are associated with living standards.
• It also involves the cost of living and coming up
  with appropriate economic policies.

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Importance of CPI

• It is used in escalating a particular dollar
  value with time.
• This helps in preserving buying power of a given
  dollar value.
• This implies that CPI is used in adjusting
  contracted payments like rent, wages etc.
• CPI is also used to escalate public and private
  pension programs, social payments, and tax
  deductions.

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• Different economic aggregates are also deflated
  using consumer price index.
• These can be income inflows that are used to
  obtain income estimates based on a constant
  dollar.
• Banks also use CPI in setting and monitoring the
  implementation of different economic policies.
• Economists and business analysts also use the
  consumer price index to analyze and research
  economic trends and issues in a country.
• weighs price movements of consumer goods and
  services on the basis of their relative
  importance in the overall consumers expenditure.
  

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CPI In the US

• The Bureau of Labor Statistics computes CPI in
  the United States.
• It measures two types of consumer price index
  statistics.
• One type of CPI statistics is the CPI for the
  urban income earners and the clerical workers.
• The other type is the CPI of all urban consumers.
• CPI for all urban consumers provides the best
  statistics.
• It represents the public in general and it
  accounts for approximately 87 percent of the
  entire population.

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• Consumer price index is commonly used in
  identifying durations of deflation and inflation.
• A rapid rise in consumer price index denotes
  inflation while a sharp drop in consumer price
  index within short duration indicates deflation.

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