Consumer Price Index
From Financial Literacy Wiki
Consumer Price Index (CPI) or Retail Price Index (RPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and considered by some a cost-of-living index.
Typically an index is scaled to 100 for a chosen year (typically known as the base year), so that all other values of the index, at any other years, are a percentage relative to this one. Usually the chosen point in time would be a calendar year, and that particular year will be what we call a base year. The base year and the basket of goods and services are usually very contentious issues when measuring CPI.
The CPI can be used to track changes in prices of goods and services purchased for consumption by households, i.e., of the consumer basket. In countries with a higher than average indirect tax system, the CPI is used along side a RPI that includes a more accurate reflection of cost of living.
When analyzing Consumer Price Index especially when looking at inflation across time, one has to take note of the following.
- Are there any changes to the base year during the period of analysis?
- Are there any changes to the basket of goods that are used for measurement?
If any of these events does analysis during the period you are studying, you might need to make some subjective adjustments in your analysis.
