The Consumer Price Index is an important measure of the total price level in any economy. The Consumer Price Index covers the goods and services that can be purchased.
It is one of the commonly used measures of inflation and deflation by governments. With this index, all prices can be calculated and compared. Experts can make retrospective analyses and forward-looking predictions based on this. Inflation is tracked, and then reports are created by statistical agencies based on the results of this tracking. The goods and services paid for by consumers should be priced and offered by sellers according to this index. At the same time, the index records are kept and stored in archives. The records can be used in the future to create new reports if necessary. The Consumer Price Index is generally calculated on a monthly or three-month frequency.
How Is the Consumer Price Index Calculated?
The Consumer Price Index is calculated based on the spending patterns of all citizens in the country. People of all ages and from all backgrounds are included in this calculation. Businesses can use this index for their target market to build a profile of their customer base.
Consumer Price Index series generally use 1982-1984 as the base period for comparison. The US Bureau of Labor Statistics (BLS) has set the index level covering the period from 1982 to 1984 as 100. A Consumer Price Index reaching 110 represents a 10% increase compared to the reference period in the market portfolio. Similarly, an index of 90 represents a 10% decrease compared to the reference period in the market portfolio.
How to Determine a CPI Market Basket?
A market basket is created by collecting detailed spending information. Governments spend significant amounts of money and time to measure expenditure data as accurately as possible. Resources are allocated to conduct surveys and research that include individuals, businesses, and households as much as possible.
What Are the Uses of the Consumer Price Index?
- Economic Indicator
- Economic Series Based on Price Changes
- Social Security Costs
Economic Indicator
The Consumer Price Index is a natural measure of the inflation and deflation faced by the public. A consistent increase in the index means a general growth in the economy.
Economic Series Based on Price Changes
National income components can be said to be another area of use. The Consumer Price Index is also used for similar economic calculations.
Social Security Costs
The Consumer Price Index is also used to calculate social security and living costs.
What Are the Limitations of the Consumer Price Index?
- Consumer Price Index may not be applicable for certain population segments in some countries.
- Consumer Price Index cannot develop official predictions for subgroups of the population.
- Consumer Price Index, as a conditional measure of cost, cannot measure everything that affects living standards.
- The two areas it includes cannot be compared.
- Social and environmental factors are outside the scope of the index.
What Are the Limitations in Measuring the Consumer Price Index?
- Sampling Error
- Non-sampling Error
- Exclusion of Energy Costs
What Is Sampling Error?
Sampling error is the risk of not choosing the correct sample for calculation.
What Is Non-Sampling Error?
It includes errors related to the collection of price data and operational errors.
What Does Exclusion of Energy Costs Mean?
The most common criticism of Consumer Price Indexes is the exclusion of energy prices from the calculation, which is a significant expense for many households.
