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Consumer Price Index

Consumer Price Index. Unit 3 – Lesson 2. CPI- Definition. The Consumer Price Index (CPI) is a measure used by countries to determine the inflation rate (the general movement in price levels). Categories.

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Consumer Price Index

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  1. Consumer Price Index Unit 3 – Lesson 2

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

  3. Categories • 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.

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

  5. Example • 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. 

  6. Answer 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%

  7. Limitations of the CPI #1 • 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.

  8. Limitations of the CPI #2 • 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. 

  9. Limitations of the CPI #3 • 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. 

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