A consumer price index (CPI) is an estimate as to the price level of consumer goods and services in an economy which is used as a way to estimate changes in prices and inflation. A CPI takes a certain basket of common goods and services and tracks the changes in the prices of that basket of goods over time. The basket of goods may include things like a gallon of gas, a loaf of bread or a haircut. An individual checks prices on their grocery store receipts to see if prices have gone up or down. The CPI does that for the entire country to find the average change in consumer prices over a set time period. CPI is way to look at the economy to determine if the country is in a period of inflation or deflation. Again, the CPI is a nationwide measure, not a direct cost of living measure for individuals.
Select a base year for the consumer price index that you want to calculate. The CPI of the base year is always set to 100.
Selecting Basket of Goods
Select a meaningful basket of goods and add the prices of all the goods in your base year. For instance, if you choose 2017 as your base year and choose a gallon of gas, a loaf of bread and a haircut as your basket of goods. Next add the prices of these three goods in the year 2017. Looking at your individual receipts or credit card reports for larger purchases is one way to find your personal basket of good's costs. Some credit card companies break down spending data to show consumers their spending in certain "baskets" as well. The US federal government uses a very large basket of goods to calculate CPI. The US government baskets of goods look at the following categories: food and beverages, housing, clothes, transportation, medical care, recreation, education and communications and other goods and services. By looking at these baskets of goods
Select CPI Calculation Year
Select the year for which you want to calculate the CPI and add the prices of all the goods in your basket of goods for that year. For instance, if you want to calculate CPI in 2017 using the basket of goods in the example, you would add the prices of a gallon of gas, a loaf of bread and a haircut in 2016 and 2017 and then compare the changes in prices between the two economic periods. A CPI can go up or down over time. When prices in an economy are falling, the economy is experiencing deflation as opposed to inflation. One time, the CPI trends in price movement have changed with different economic subperiods causing generations to experience different price changes. Wartime CPI is different than CPI during recessions or prosperous economic years.
Calculating Consumer Price Index
Divide the price of the basket of goods in the year for which you are calculating CPI by the price of the basket of goods in the base year and multiply the result by 100 to calculate the CPI in that year. For instance, if your basket of goods cost $50 in 2013 and $55 in 2018, you would divide 55 by 50 and multiply the result by 100 to calculate that the CPI in 2018 is 110. This means prices increased 10 percent from 2013 to 2018.