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Cpi and Inflation

The Consumer Price Index (CPI) measures changes in prices over time of goods and services commonly purchased by households. It tracks the prices of a basket of items and is used to calculate inflation rates. To calculate the CPI, prices of items in the current period are compared to prices of the same items in a base period. Inflation is then measured as the percentage change in the CPI from one period to another. The document provides an example of calculating the CPI index and inflation rates for different years using a sample basket of goods.

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64 views2 pages

Cpi and Inflation

The Consumer Price Index (CPI) measures changes in prices over time of goods and services commonly purchased by households. It tracks the prices of a basket of items and is used to calculate inflation rates. To calculate the CPI, prices of items in the current period are compared to prices of the same items in a base period. Inflation is then measured as the percentage change in the CPI from one period to another. The document provides an example of calculating the CPI index and inflation rates for different years using a sample basket of goods.

Uploaded by

help35027
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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To find out the items of CPI and inflation

CPI :

The Consumer price index (CPI) is calculated by collecting data on the prices
of a “basket” of commonly purchased goods and services overtime. These
items include food, Transportation, housing, Medical care and more.

Inflation :

Inflation is measured by tracking changes in the CPI over specific periods like
monthly or yearly. Government agencies or statistical organizations typically
gather this data from various sources as surveys, retail stores and services
providers to calculate Cpi and inflation rate.

Formula for calculating items of CPI:


Following are the steps for calculating the CPI.
1. Selecting the base year :
Choose reference year as the base year for comparison.
2. Basket of goods:
Determine the items and their respective weights in the basket of goods and
services that represent typically consumer spending.
3. Price data:
Collect the price of these items in the current period (P1) and the prices in
the base period (P0) .

𝑪𝒐𝒔𝒕 𝒐𝒇 𝒃𝒂𝒔𝒌𝒆𝒕 𝒊 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒑𝒆𝒊𝒐𝒓𝒅


CPI formula= ( )X100
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒃𝒂𝒔𝒌𝒆𝒕 𝒊𝒏 𝒃𝒂𝒔𝒆 𝒑𝒆𝒓𝒊𝒐𝒅

Or more precisely
∑( × )
( )× 100
∑( × )

Inflation rate can be calculated using CPI.


Inflation rate = ( )× 100

These formulas help determine changes in the cost of living or the


purchasing of power of a currency overtime .
2016 base year 2017 2018
Good Price ($) quantity Price ($) Price($)
Soccer balls 10 100 15 18
Shoes 50 40 52 56
Concert 100 20 104 110
tickets

1. Calculate the total cost of purchasing the base year fixed basket(100
Soccer balls,40 Shoes, 20 Concert tickets) in each year.

for 2016: ($10×100) + ($50×40) + ($100×20) = $5000.

for 2017: ($15×100) + ($52×40) + ($104×20) = $5660.

for 2018: ($18×100) + ($56×40) + ($110×20) = $6240.

2. Construct CPI index:


𝑪𝒐𝒔𝒕 𝒐𝒇 𝒃𝒂𝒔𝒌𝒆𝒕 𝒊 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒑𝒆𝒊𝒐𝒓𝒅
CPI in year X= ( )X100
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒃𝒂𝒔𝒌𝒆𝒕 𝒊𝒏 𝒃𝒂𝒔𝒆 𝒑𝒆𝒓𝒊𝒐𝒅

CPI in 2016 = × 100 = 100

CPI in 2017 = × 100 = 113.2

CPI in 2018 = × 100 = 124.8

Inflation rate = ( )× 100

3. Calculate the inflation rate in 2017 and 2018.

.
Inflation rate in 2017 = × 100 = 13.2%

. .
Inflation rate in 2018 = × 100 = 10.25%
.

The End

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