CPI (Consumer Price Index)

DEFINITION of Consumer price index (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services.

Such as transportation, food, and medical care.

WHAT IT IS IN ESSENCE

It comes when calculating price changes for each item in the predetermined basket of goods and averaging them. 

CPI uses a “basket of goods” approach that aims to compare a consistent base of products from year to year. And it is focusing on products that consumers are buying and using on a daily basis.

The CPI is a statistical estimate. It uses the prices of a sample of representative items whose prices are collecting periodically. 

Sub-indices and sub-sub-indices are computing for different categories. Also for different subcategories of goods and services. They are combining to produce the overall index with weights reflecting their shares in the total of the consumer expenditures.

It is one of several price indices calculated by most national statistical agencies.

The annual percentage change in a CPI is using as a measure of inflation. A CPI is useful for indexing the real value of wages, salaries, pensions. Also for regulating prices and for deflating monetary magnitudes to show changes in real values.

In most countries, CPI is one of the most important national economic statistics. It is equally important as the population census.

You can see the movements in CPI in percentages.

Positive movements indicate inflation and drop signifying deflation.

HOW TO USE

A major part of the remit of central banks is keeping inflation in line with targets.

To do so they will use monetary policy adjustments, like changing the base interest rate.

Often, more than one index of consumer prices is necessary to judge inflation in a particular economy. Different goods and services are measures to evaluate different sections of the population. The CPI and RPI (or retail price index) are important.

Both are calculated differently, with the RPI taking house prices into account while the CPI does not, for instance.