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Consumer Price Index

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Jansen Arnold

on 16 April 2010

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Transcript of Consumer Price Index

Consumer Price Index Consumer Price Indexing is a measurement of the ALL goods and services purchased in a certain time period, usually yearly.
In other words, CPI measures the price change, for the same goods, from one year to the next.
CPI is measure for the entire country, states, regions, and cities, or products individually.
What is CPI? As the last slide shows, CPI can be categorized into many different things like food, hair cuts, cities, etc. But there are two different types of CPI.
CPI for urban wage earners and clerical workers (CPI-W), about 32% of population.
CPI for all urban consumers (C-CPI-U), about 87% of population.
Two Types of CPI As the name implies, CPI is an index. It is a tool to help understand comparison. Just like in class when we compared populations of different countries, CPI compares amounts of goods in two different years and gives, what basically is a percentage change.
What does it actually mean? CPI is another way of showing inflation, but there are other ways CPI can be useful such as computing real income, determining cost of living adjustments, purchasing power of the dollar, deflating sales, and many other economic issues.
What do these numbers mean? Understanding real income is vital for every worker’s finances.
For example, if a worker is making $50,000/yr and gets a raise to $75,000/yr, but the CPI, or increase in cost, of all of his purchased items from this year to last year increased from $30,000 to $60,000, then the worker’s real income actually decreased.
How CPI affects us CPI is also an indicator of purchasing power of the dollar. This shows how much your dollar is actually worth according to how much it can buy.
Dividing the CPI by one dollar and multiplying by 100 gives you the actual purchasing power of your dollar.
If CPI is 300, then your purchasing power is $0.33
Purchasing Power COLA is an acronym for cost of living adjustments. CPI directly effects how much money many people are awarded on a daily basis. These situation are only some of the many ways CPI effects COLA.
Calculating child support payments
Worker’s compensation
Apartment and home rentals
Welfare payments
COLA CPI is also important to big businesses. If Apple knew their sales went up 20%, that would sound nice, however if their costs also increased, how much did they really make?
That is determined by Producer Price Index, which is just like CPI except they only calculate differences in raw materials that were purchased, and is usually monthly.
Deflating Sales CPI is involved in almost every person’s life. Almost every decision we make will either effect CPI, or is because of CPI.
CPI is important because money is important. Understanding your finances can be the difference between living debt free and possibly going bankrupt.
Why you should have been paying attention How to calculate CPI in 5 Steps Step 1 Determine the goods and the time frame for which you are interested in measuring the inflation rate. People often want to know how prices have increased over the period of 1 year. Suppose, for simplicity's sake, that you are interested in the inflation rate for a basket of goods that includes a gallon of milk, a loaf of bread and a paperback novel. Step 2 Calculate the number of units you purchase of these goods and the prices you paid 1 year ago. For example, suppose you buy 4 gallons of milk, 3 loaves of bread and a paperback per month and that 1 year ago, you paid the following prices: $2.75 per gallon, $2 per loaf, and $7 per novel. This means that you spent a total of $24 a month 1 year ago for these goods.

Step 3 Repeat step 2, but this time consider the prices you pay now. Suppose the current prices are $3.50 for a gallon of milk, $2.50 for a loaf of bread, and that the price of a paperback is the same $7. This means that you now spend $28.50 a month for the same basket of items. Step 4 Subtract the amount you spent per month one year ago ($24) from the amount you spend now ($28.50). Then take the difference ($4.50) and divide by last year's amount ($24). This gives you a result of 0.188 (with rounding).

Step 5 Multiply the result you obtained in step 3 (0.188) by 100 to obtain the percentage rate increase for the selection of goods you're interested in studying. For this example, the results show that the consumer price index for a gallon of milk, a loaf of bread and a paperback novel increased 18.8 percent in the past year.
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