Consumer Price Index

Consumer Price Index (CPI) is a statistical estimate that measures the average price of consumer goods and services purchased by households. The CPI is a significant indicator of inflation and purchasing power of a country's currency.

Overview[edit | edit source]

The Consumer Price Index is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The goods and services included in the basket are determined by the Bureau of Labor Statistics in the United States. The CPI is used to adjust income eligibility levels for government assistance and to adjust income tax brackets to prevent inflation-induced increases in taxes.

Calculation[edit | edit source]

The CPI is calculated using a Laspeyres formula, which uses a fixed basket of goods and services. The basket is representative of the goods and services purchased by a "typical" consumer. The prices of the goods and services in the basket are collected periodically, and the changes in these prices are used to calculate the CPI.

Uses[edit | edit source]

The CPI is used for a variety of purposes, including:

Adjusting income eligibility levels for government assistance programs
Adjusting income tax brackets to prevent inflation-induced increases in taxes
As a measure of inflation or deflation
As a gauge of the effectiveness of government economic policy
As a means of adjusting dollar values

Criticisms[edit | edit source]

There are several criticisms of the CPI, including:

It does not account for changes in product quality
It does not account for changes in consumer preferences
It does not account for changes in the geographical distribution of consumption
It does not account for the substitution effect

See also[edit | edit source]

Consumer Price Index Resources
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