The consumer price index (CPI) is metric that denotes prices of goods and services including food items, transportation, medical care, and others used by individuals in a country during a specific time period. The metric is calculated by taking weighted average prices of list of goods and services. Weights are based on the importance of the goods and services in a particular country.
Explanation of Consumer Price Index – CPI
Changes in the CPI reflect change in cost of living during a particular period. Rising CPI level denotes increased costs of living. The opposite is the case with decreasing CPI level. Government agencies periodically calculate and publish CPI levels. They prepare sub indexes for different categories of goods that are aggregated to show the overall consumer price index.
Annual change in CPI is used to gauge the inflation level in a country. This metric is one of the most closely monitored metrics in a country that reflects general economic condition in a country. Moderate increase in annual CPI is not bad for the economy.
In fact, manufacturers are encouraged by the increase in CPI or inflation levels to increase their production levels. On the contrary, decreasing CPI levels, also known as deflation, results in general slowdown of the economy as manufacturers do not have the incentive to increase the production. Most countries try to avoid this through taking certain monetary measures such as using negative interest rate policies.
Gaining economic insight is difficult from looking at raw CPI levels as it does not tell the changes that have occurred due to changing seasonal patterns or economic conditions. This drawback can be overcome by looking at seasonally adjusted CPI levels that eliminates the changes due to seasonal effects that happen in the same period of time and also about the same extent every year. Some of the factors that are adjusted include production cycles, holidays, and weather conditions.
In the US, the Bureau of Labor Statistics publishes two main types of CPI statistics. These include the CPI-W, which is the consumer price index for urban clerical workers and wage earners, and C- CPI-U that refers to chained consumer price index of all urban consumers. The latter better reflects the overall inflation levels in the country as it accounts for more than 85% of the total population.
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