Friday, 4 May 2012

Consumer Price Index

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II. Consumer Price Index

A common method used to measure inflation is through the use of the Consumer Price Index, commonly referred to as CPI. CPI is a measure of the average price of goods commonly bought by households. By comparing the CPI, and therefore the general price level at different times we can easily measure the rate of inflation. For example, if CPI in January is 100, and in January of the next year is 110, we can determine the rate of inflation by subtracting 110-100, dividing the resulting 10 by 100, and multiplying the results by 100. This gives us an inflation rate of 10% from year 1 to year .

How CPI is collected is an important factor that will influence the accuracy of the inflation rates that we determine. The CPI that covers the 80% of the population is the CPI-U, which is determined for All Urban Consumers. The other CPI is for Urban Wage Earners and Clerical Workers (CPI-W) and is a subset of the CPI-U. The CPI-W is based on the expenditures of a sample of families living in urban areas who meet the additional requirements related to employment. The CPI-W represents about 0% of the total U.S. population. The CPI-U and CPI-W total more than 100% since there is overlap of the population represented because the CPI-W is a subset of the CPI-U. For this project we will focus mainly on CPI-U since it covers most of the population, (Wolford).

In calculating CPI approximately 0,000 prices are collected in 1 urban areas across the country. The CPI is determined based on prices of food, housing, apparel and upkeep, transportation, medical care, entertainment and other goods and services that people buy for day-to-day living. You may notice that from these different categories, different inflation rates can be determined. Medical care tends to have the highest annual inflation rate, while apparel and upkeep tend to have the lowest, (Wolford).

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The collection of CPI data has many uses. We already know that CPI is the most widely used measure of inflation. CPI data can also be an indicator of the effectiveness of government policy. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions, (US Department of Labor). CPI is also used an indicator of future inflation rates. If we can use current and past data to anticipate future price changes we anticipate future inflation rates. Therefore the use of CPI data can help us make important future economic decisions.

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