What Is The Consumer Price Index (CPI)?

Definition of Consumer Price Index (CPI)

First Published: AdawnJournal.com April 7, 2010

Something that is very important for the economy, but which a lot of people do not understand, nor know about, is the Consumer Price Index. The Consumer Price Index is important because it provides a measure of the average price of consumer goods and services from one period to a next within a city, region or country.

As can be expected, this gives an indication of how much people are paying for goods and services. The more people have to pay for goods and services, the worse the economy is generally doing because of the rate of inflation. Inflation is typically higher when the economy is doing poor, which influences the Consumer Price Index.

The Consumer Price Index is determined by measuring the price of a group of goods, which would represent the typical purchases of a consumer. In addition, the Consumer Price Index can be used to index things like wages, pensions and salaries. For economists, watching the Consumer Price Index along with the census of the country is very important for determining national economic statistics.

In the past, the Consumer Price Index of the United States has provided a good indication of the strength of the economy. From 1971 to 1977, the Consumer Price Index of the United States increased by an astounding 47 percent, showing the rapid inflation that was happening at the time. In 2009, the Consumer Price Index actually fell for the first time in over 50 years, dating back to 1955.

In Canada, prices are measured against a base year to find the Consumer Price Index. Currently, the base year is 2002 and the value for the 2002 basket of goods is 100.  In 2008, the Consumer Price Index had reached 114.1 – this simply means that what would cost $100 in 2002 cost $114.10 in 2008.

Two pieces of data are needed to create the Consumer Price Index; price data and weighting data. Price data is the collection of the goods and services from a few retail stores at a certain time and in various locations. So, this could be getting the price of bananas from four different grocery stores in three different cities in the American Northeast. Weighting data is the estimate of the shares of different types of expense data as a fraction of total expenses covered by the index. This information usually comes from sample decades and sample homes.

Of course, there are limitations to the Consumer Price Index. For one, consumer expenses done in foreign countries are not done, as well rural populations are often not included. As well, the very rich and very poor are often excluded as sample groups. Something that is always excluded is savings and investments, but the cost of financial services is included, as is insurance.

Everything will be weighted differently within the Consumer Price Index as well. For example, on 100,000 items from 20,000 stores and 30,000 rental outlets will be brought together and averaged out so that Housing accounts for 41.4 percent, Food and Beverages at 17.4 percent, Transport at 17 percent, Medical Care at 6.9 percent, Misc. at 6.9 percent, Apparel at six percent and Entertainment at 4.4 percent.

The Consumer Price Index is not something most people will think about, but it gives them a good indication of how their country’s economy is doing.