The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in a predetermined basket of goods and averaging them. Changes in the CPI are used to measure inflation, which is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
How to Calculate CPI:
The formula for calculating the CPI for a given period is:
CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) * 100
The base year is a reference year chosen for comparison, and its CPI is typically set at 100.
How to Calculate Inflation Rate:
Inflation rate measures the percentage change in the CPI between two periods. The formula is:
Inflation Rate = ((CPI in Current Period - CPI in Previous Period) / CPI in Previous Period) * 100
Alternatively, if you have the cost of the basket for two consecutive years, you can calculate the inflation rate directly:
Inflation Rate = ((Cost of Basket in Current Year - Cost of Basket in Base Year) / Cost of Basket in Base Year) * 100
A positive inflation rate indicates that prices have risen, while a negative rate (deflation) indicates that prices have fallen.
Example:
Let's say the cost of a hypothetical basket of goods and services was $100.00 in the base year (e.g., 2020). If the cost of the same basket in the current year (e.g., 2023) rises to $125.50, we can calculate: