What is the Consumer Price Index (CPI)? 5 simple steps to calculate CPI

The CPI is The abbreviation of the noun phrase Consumer Price Index, also known as the consumer price index. Used to measure the average price of a good or service when purchased by a consumer over a specified period of time. More specifically, this reflects the relative change in the price of a consumer good over time and is expressed as a percentage. When the CPI suddenly rises for a fixed period of time, then the economy is entering the inflationary phase. Therefore, this consumer price index is very commonly used to measure the price level as well as the change in the price level, thus predicting possible inflation in the future and finding ways to avoid it. If you still have questions about the index “What is CPI?” Good way calculate the consumer price index in the simplest and fastest way, then find out with kiemtien.com through the article below!

How to calculate the consumer price index you should know

Determining the consumer price index for a given time period in a given area is not simple, but it is a process of research, information gathering and analysis to produce relative results. Specifically, to calculate the consumer price index, you need to perform the following 5 basic steps:

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What is the Inflation Index (CPI)?

Step 1: Fix the cart

The first is to determine the fixed amount of goods by investigating typical products and services that a typical consumer has purchased for use.

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Goods and services here include: Food, newspapers, accommodation, CDs, clothing, etc. Where food is the most spent commodity. It accounts for a large proportion, important for daily life. Then there are the consumer price indices of movie tickets or toothpaste…

Step 2: Determine the price

Collect the necessary information and carry out statistics and pricing of all types of goods and services in the fixed basket of goods at any given time.

Step 3: Calculate the cost to buy the basket of goods according to the formula

Calculate the total cost to purchase this basket of goods by multiplying the price of each item in the cart by the quantity, then adding up all the results to get the total cash cost.

Step 4: Calculate the consumer price index for the years

To calculate the consumer price index for each period, you need to apply a simple formula as follows: The formula is CPit = (cost to buy the product in the period

Formula to calculate the consumer price index by years

Another observation is that the base period will vary between 5 and 7 years.

Step 5: Calculate the inflation rate

After obtaining the CPI, the next step will use the results found to continue calculating the inflation rates, the formula is as follows: Inflation index = 100 x (CPI year to be calculated – CPI base year) / CPI base year

The formula for calculating the inflation rate

For example, 2011 inflation = 100 x (2011 CPI – 2010 CPI) / 2010 CPI

the meaning of Consumer Price Index

Based on the CPI index to be able to reflect the trend and level of fluctuations in retail prices of consumer goods and services used in the daily life of the population and families. Thanks to this, users can control the cost of living and be more flexible when prices change. When the CPI rises, the average price level rises. On the other hand, when the CPI falls, the average price level decreases.

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Furthermore, a fluctuating CPI can cause inflation or deflation, thus bringing down an entire economy. Once prices rise to uncontrollable levels, inflation becomes hyperinflation. An excellent example is the crisis in Hungary (July 10, 1946). Prices rose by almost 350%/day causing hyperinflation. This makes Pengo useless and becomes the lowest currency. (Theo Cris Carter / July 10, 1946: Hungary suffers the worst hyperinflation in the world, Money Week).

Also, due to a decrease in aggregate demand, the CPI of the general price level decreases. Causing deflation, leading to economic recession and widespread unemployment.

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Problems encountered when calculating the consumer price index

By using a fixed basket of goods, in the calculation of the CPI, there will be 3 problems considered limited, which are:

Do not reflect alternate displacements: In some cases where the item is pinned in a bulk price increase basket, consumers will tend to limit purchases of items that have become too expensive and will instead consume more goods that have become too expensive. Therefore, this factor causes this CPI to overestimate the actual price level.

It does not reflect changes in the quality of goods and services: If the price of a good increases, but the quality also increases accordingly, then the price obviously does not increase. Therefore, in general, the quality of goods and services tends to improve, so the CPI overestimates the price level.

Does not reflect the arrival of new goods: As a fixed basket of goods is used in the CPI calculation, once new goods appear, that same currency can buy a much better variety of goods. The CPI overvalues the price level when it really does not reflect the increase in the purchasing power of the currency.

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With the ability to directly affect the development of an economy is very large, so the analysis and calculation of the CPI will bring positive impacts to companies. It also helps consumers prepare for future cost-of-living changes. Hopefully, through what we've shared above, you'll have a little more clarity on what CPI is? as well as the steps for a simple complete CPI calculation. If you have any questions about this indicator, please contact us for dedicated support and answers.