Consumer Price Index

Consumer Price Index refers to an indicator of price variation in the prices of consumer goods as well as services that are bought by households. Typically, the consumer price index measures changes in the price levels of services and goods that people in a country purchase over time.

It examines the average price of the consumer basket of goods bought and the services hired by consumers such as medical care and transportation. It is calculated by averaging changes in the price of items in predetermined baskets. Changes in consumer price index help countries in assessing changes in price that are associated with living standards or cost of living and coming up with appropriate economic policies.

Additionally, the consumer price index is used in escalating a particular dollar value with time and preserving buying power of a given dollar value. This implies that CPI is used in adjusting contracted payments that include rents, wages, spousal or child support and leases among others. CPI is also used to escalate public and private pension programs, social payments, and tax deductions.

Different economic aggregates are also deflated using consumer price index. These can be income inflows that are used to obtain income estimates based on a constant dollar or expenditure flows that are used in obtaining estimates of personal expenditures when prices are constant.

Banks also use CPI in setting and monitoring the implementation of different economic policies. Economists and business analysts also use the consumer price index to analyze and research economic trends and issues in a country. These include causes of inflation and its effects. Using CPI, economists and business analysts are also able to understand differences in price changes in a region.

Consumer price index weighs price movements of consumer goods and services on the basis of their relative importance in the overall consumers’ expenditure. Each service or good is considered as an element in the consumer’s basket and it represent consumer spending. The price movement of that good or service is then assigned a share in the basket that is proportional to the overall consumption expenditure.

The Bureau of Labor Statistics computes CPI in the United States. It measures two types of consumer price index statistics. One type of CPI statistics is the CPI for the urban income earners and the clerical workers. The other type is the CPI of all urban consumers. CPI for all urban consumers provides the best statistics because it represents the public in general and it accounts for approximately 87 percent of the entire population.

Consumer price index is commonly used in identifying durations of deflation and inflation. A rapid rise in consumer price index denotes inflation while a sharp drop in consumer price index within short duration indicates deflation.

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