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Consumer Price Index

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Consumer Price Index

Unit 3 – Lesson 2

- The Consumer Price Index (CPI) is a measure used by countries to determine the inflation rate (the general movement in price levels).

- Within the eight categories are over 600 items that an average family of four would consume.
- Clothing and footwear;
- Alcoholic beverages and tobacco products;
- Health care;
- Shelter;
- Transportation;
- Food;
- Recreation, education, and reading;
- Household operations and furnishings.

- Inflation rate= (CPI year 2 – CPI year 1)/ CPI year 1 x 100
- Year one= the older year
- Year two= the most recent year.

- In 1995, country X’s overall CPI was 200, and in 1996 it was 211. The inflation rate is calculated as shown in the example below
- (211-200)/200 x100 = 5.5% is the inflation rate for the year.

Country X has a CPI rate of 312.7 in 1996. The same country X has a CPI of 420.5 in 2006. 1. What is the overall inflation rate? 34.47%

2. What is the overall average yearly inflation rate?3.45%

- An issue of interest regarding the CPI is the weighting of different categories.
- The CPI is a statistical model that generalizes its results on all Canadians despite the fact that some Canadians do not spend any money on certain items.
- These inconsistencies result in a generalization that works for the ‘’typical’’ urban family, not all the families in Canada.
- Thus for example if there were a huge increase in tobacco prices in a given year and you do not consume tobacco, this generalization would not be applicable to you.

- According to Stats Can, the average family consists of four people.
- All calculations of the CPI are based on this number. It comes as no surprise to most people that many households do not have 4 members.
- Thus these averages are approximations of the annual inflation and not the actual inflation.

- Certain key items are omitted from the calculation of the CPI.
- The inclusion of the cost of new automobiles and housing was removed from the CPI in the late 70’s because these items were considered to be inflationary.
- This omission is a clear break from the stated purpose of the CPI. The index is a theoretical model, but if important elements are removed because they are too inflationary, this invalidates the use of the CPI.