Consumer price index
Family IX · Macro
Not to be confused with index.
Consumer Price Index (CPI) is a weighted average of prices for a representative basket of consumer goods and services, published periodically by national statistical agencies. It tracks price changes from a base period, which is assigned an index value of 100. CPI is widely used to adjust wages, pensions, and government benefits, and as a benchmark for inflation-linked securities.
Calculation and weighting
The CPI is computed by pricing a fixed basket of goods and services in each period and comparing the total cost to the cost in a base period. The basket is based on household expenditure surveys and updated periodically. Each item is assigned a weight reflecting its share of total consumer spending. The index formula typically uses a Laspeyres-type calculation, which holds quantities constant at base-period levels. The result is expressed relative to the base period, where the base index equals 100.
Worked example
Assume a simplified basket with three items: food, housing, and transportation. The base-period prices and quantities are given, and the current-period prices are observed.
The CPI of 106.875 indicates a 6.875% increase in the price level from the base period.
Uses and limitations
CPI is used to measure inflation, adjust income payments, and deflate nominal values into real terms. It is also the reference index for inflation-linked bonds and derivatives in many countries. However, CPI may not reflect individual experience because it averages across all urban households. It also excludes certain items such as investment assets and may not capture substitution effects if the basket is not updated frequently. Different countries may use different baskets and methodologies, so cross-country comparisons require care.
Often confused with
- index
- An index is any statistical measure that expresses a value relative to a base, while the Consumer Price Index is a specific index of consumer prices; the visible sign is that CPI always refers to a basket of consumer goods and services.