A consumer price index (CPI) provides us with changes in the price level of consumer services and goods purchased domestically by households. The Consumer Price Index in the United States is defined as the average change in the prices over time paid by urban consumers of consumer goods and services in the market.
The CPI is basically a statistical estimate which is constructed on the basis of prices of a sample of representative items whose prices are collected from time to time. Various Sub-indexes and sub-sub-indexes are calculated for different categories of goods and services, which help in combining all to produce an overall index with weights reflecting the shares of consumers in the total of the consumer expenditures covered. It is an important factor for country’s economy and is one of among several price indices calculated by national statistical agencies. It leads to the calculation of a very important factor that is inflation. The annual percentage change in a CPI is a measure of inflation. A Consumer Price Index can also be used for the real value of wages, pensions, and salaries, for regulating prices and for decreasing monetary magnitudes to show variations in real values. In most countries, the CPI is taken as one of the most watched national economic statistics. Formulas used for calculating CPI are-
For a single item, CPI –
Other formula for CPI is
The “updated cost” refers to the price of that item in given year which is divided by the initial year that is the base year.
For multiple items, CPI –
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