CPI

Summary

The Consumer Price Index (CPI) measures the average change in prices of a basket of goods and services typically consumed by households over time. It’s used as a key indicator of inflation and shows how the cost of living changes.

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Content

How Does CPI Work?

1. Basket of Goods: CPI is calculated based on a standardized “basket” of items, which might include food, transportation, housing, clothing, healthcare, etc.
2. Base Year: A specific year is chosen as the baseline (CPI = 100). The prices of the basket in other years are compared to the base year.
3. Formula:

$$\text{CPI}=\frac{\text{Cost of Basket in Current Year}}{\text{Cost of Basket in Base Year}}\times 100$$

Example of CPI

1. Base Year (2020):

   • Basket includes:
     • Bread: $2
     • Milk: $3
     • Transportation: $50
     • Total Cost: $55
   • CPI for 2020 = 100 (Baseline).

2. Current Year (2024):

   • Same basket, but prices have increased:
     • Bread: $2.50
     • Milk: $3.50
     • Transportation: $55
     • Total Cost: $61
   • CPI for 2024: 6155×100=110.91\frac{61}{55} \times 100 = 110.915561​×100=110.91
   • Interpretation: The CPI is 110.91, meaning prices have increased by 10.91% since 2020.