The Consumer Price Index is a very important statistical measurement used by many economists to evaluate trends. It is well known that the value of a dollar changes over time, and this measurement provides the necessary information needed to asses this change in addition to other economic indicators.
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Definition
The Consumer Price Index, or the CPI, is a type of price index. A price index is a measurement of the cost to purchase a bundle, or what's commonly referred to as a market basket, of goods or services at a certain time that is then compared to the cost of buying the same market basket at an earlier time. The CPI is one of the most popular price indexes that is used, and it estimates the changes in prices between any two given time periods for the goods and services that consumers use on a daily basis. The U.S. Bureau of Labor Statistics, or BLS, uses the CPI to compare the prices difference of items in eight major group that consumers living in urban areas purchase that includes food and beverages, apparel, housing, medical care, education and communication, transportation, recreation, and other goods and services.
Usefulness
The BLS lists the variety of ways in which the CPI is used in regards to economic matters. It's most frequently used to measure inflation, which is the change in the level of prices from year to year expressed in a percentage. The CPI trends are used by the president of the United States, the Federal Reserve Board, and Congress to develop fiscal policies. As a result, many also consider the CPI to be an indicator of the effectiveness of the economic policies created by the government. The CPI is also used to determine the purchasing power of the consumer's dollar, which indicates the change in the value of goods and services that consumers can buy with a dollar during different times that changes since the purchasing power decreases as prices increase. Additionally, the government utilizes the CPI in various ways that benefit citizens such as adjustments to Social Security income payments, the government assistance income eligibility levels, and cost-of-living adjustments for military service members.
Calculations
Although the process that the BLS uses to gather the information to calculate the CPI is very detailed and time-consuming, the actual calculation of the CPI is straightforward. The CPI is the result of the cost of the market basket in a given time period divided by the cost of the market basket in the base time period, multiplied by 100. Currently, the BLS uses the base time period as the years between 1982 and 1984 for most of their CPI calculations. To calculate inflation, a common use for determining CPI, the CPI in period one is subtracted from the CPI in period two, then divided by the CPI in period one and finally multiplied by 100. The resulting answer is the inflation rate expressed as a percent.
The CPI allows individuals to properly analyze various aspects of the economy. Keeping a close watch on economic indicators allows for the appropriate actions to be taken when needed as is implemented by governmental fiscal policies. Citizens of the United States are often impacted, knowingly or unknowingly, by the widely used Consumer Price Index.