The consumer price index is an index that measures the changes in the consumer price of the products. The consumer price index is calculated and published every month by Bureau of Labor Statistics. Consumer price index is one of the most technical and widely used methods of measuring the degree of inflation.
Example of Consumer Price Index
The major objective of the consumer price index is to measure the change in the prices of almost 80,000 commonly used things by the public of a country. These 80,000 things constitute a collection that is known as market basket. The goods and services fall in eight different categories that are commonly used by the people. These categories can be identified as under:-
- Food and Beverages
- Medicine and Medical Care
The market basket is updated after a few years in order to remove obsolete and outdated products from the market basket. This removal is done via BLS. The data is also collected by BLS and in order to do so their assistants have to visit about 20,000 shops or stores or service points. BLS has to contact about 50,000 landlords, and thousands of tenants of about 87 urban areas to collect the data regarding the items in the market basket.
How to Calculate Consumer Price Index
These values are then compared with the BLS statistics of the starting year to find out whether the prices of consumer goods are increased or decreased during the interval. To do this, the BLS sets the average price of the market basket during the years 1982, 1983, and 1984 to equal 100. Then in every subsequent period, the BLS calculates price changes in relation to that number. A resulting CPI of 120, for example, means that prices are 20% higher than they were in the base period. By comparing the difference in CPI in consecutive months or years, we can calculate the percentage increase in prices, giving us the inflation rate.