CPI stands for consumer price index. The consumer price index measures the rise in cost, or decrease, over time. Calculating CPI is fairly straight forward. It’s simply a ratio of current price to past price on a 100 point scale.
CPI is used in economics mostly to track the rise in cost of consumer goods. Tracking this metric is important in understanding the economy and the direction it’s headed. For example, high inflation is associated with a high CPI for almost all items. You can calculate the CPI of an individual item, or or a set of items taken as an average. In economics a large sample of products is often used to calculate a overarching CPI on a certain segment, usually when it relates to food products and consumer goods.
Enter the past price and current price of any item to calculate the consumer price index (CPI) of that item.
The formula for CPI is as follows:
CPI = Current Price / Past Price *100
As you can see, it’s a simple ratio of current to past price on a 100 point scale. This is also often times represented by a percentage.
CPI is analogous with inflation, or more simply it’s a representation of inflation in consumer good. The U.S. Bureau of Labor Statistics (BLS) reports the CPI on a monthly basis, going as far back as 1913. It’s solely a measure of retail goods and items paid by consumers, and does not include savings or investments.
How is CPI Used?
As mentioned previously, CPI is mostly used for a measure of inflation. This measure is then used often times to determine the effectiveness of a governments policy. It can also be used as an indication for a deflator and other economic factors. That is it will tell you if your buying power is increase or decrease when compared with the rise of decline of wages in the same period of time.
CPI is also used to adjust your eligibility for government assistance. this includes things like Social Security. These programs are all affected by the consumer price index.
Why is CPI important to you?
In short, it’s important because of what’s already mentioned above. It effects not only your day to day life and buying power of things like groceries and retail goods, but it also effects your retirement, social security, and other government assistance programs.
Keeping an eye on the CPI is important to making informed decisions. Hopefully this article as helped you understand this term a little more.