Consumer Price Index
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most widely used indicators for inflation and economic health. The CPI is calculated by taking the price changes for each item in the predetermined basket of goods and averaging them.
How CPI is Calculated
To calculate the CPI, price data is collected for a representative sample of goods and services from a variety of areas, such as housing, transportation, and food. These prices are then compared to a base period, usually a specific year. The percentage change in prices from the base period to the current period is then used to calculate the CPI.
Uses of CPI
The CPI is used by policymakers, economists, and investors to gauge the overall health of the economy. It is also used to adjust income and eligibility levels for government assistance programs, such as Social Security benefits.
Limitations of CPI
While the CPI is a valuable indicator of inflation and economic health, it has some limitations. Critics argue that the CPI does not fully capture changes in the cost of living, as it may not account for changes in consumer behavior or new products and services. Additionally, the CPI may not accurately reflect differences in regional costs of living.
