CPI – Consumer Price Index

Consumer Price index(CPI)  is the average price of product and services purchase by the consumers. Where The GDP price index measure the rate inflation of all products and services on the other hand CPI indicates the change in consumer prices for the defined time period, increase in index shows the level of inflation at consumer end.  There are many different CPI is calculated by region,types of products, types of consumer etc. The most common CPI is CPI-U, which is CPI for urban area because maximum percentage of products are purchased in urban areas. CPI is calculated for the given basket of goods to determine the change in index on monthly or annually.

Formula to Calculate CPI

CPI = Basket in any given year/ Price of the same Market * 100

CPI =  $300/$200 * 100 = 150

CPI Uses

Consumer Inflation

Consumer price index show the change in consume products in a given period of time.

Deflator of other economic series

The CPI and its components are used to adjust other economic series for price change and to translate these series into inflation-free dollars.

Adjusting income payments and Taxes

Over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI. The index affects the income of almost 80 million people as a result of statutory action: 47.8 million Social Security beneficiaries, about 4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients. Changes in the CPI also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private firms and individuals use the CPI to keep rents, royalties, alimony payments and child support payments in line with changing prices. Since 1985, the CPI has been used to adjust the Federal income tax structure to prevent inflation-induced increases in taxes.