How is CPI Used: Meaning, Working and Process

The type of calculation involved during the estimation of CPI is quite complicated. Different categories and sub-categories are made to segregate the consumption items based on consumer groups, including urban and rural inhabitants. The national statistical organisations compute the final overall price index based on these indices and sub-indices.

In recent times, CPI has become the most prevalent method to analyse price inflation and is applied as a macroeconomic indicator by the Indian Government and the Reserve Bank of India (RBI). They use CPI to determine price inflation and plan their economic rules and strategies accordingly.

Mentioned below is the list of eight agencies that use the Consumer Price Index (CPI) to predict inflation and take economic decisions:

• Attire
• Food and Drink
• Housing
• Education
• Healthcare
• Transportation
• Communication
• Leisure

If you are wondering how CPI works, look at the easy steps to calculate the consumer price index.

Step 1: Gather Prices for Certain Products and Services from the Past

Step 2: Gather Prices for Current Products and Services

Step 3: Sum Up All Prices Together

Step 4: Divide Total Present Product Price by Total Past Product Price

Step 5: Multiply the result by 100

Once you get the values from the last step, multiply the numeral by 100 to get the exact Consumer Price Index (CPI).

To get a better elaboration, check out the formula to calculate the CPI in an economy.

Consumer Price Index (CPI) = (Cost of Fixed Basket of Goods and Services in Current Year/Cost of Fixed Basket of Goods and Services in Base Year) X 100.

Remember that this formula only applies to figure out the inflation rate once you have computed the Consumer Price Index for two years.

The formula to calculate Consumer Price Index in an economy is:

CPI = Cost of market basket in the current year/Cost of market basket in the base year X 100

Suppose that the cost of market basket in the present year is ₹11.50 and cost of market basket in the base year is ₹8.75.

Then, the equation will stand at ₹11.50 / ₹8.75 = 1.32

After this, multiply this number by 100, which will be 1.32 X 100 = 132

Now, deduct this numeral from 100 in order to get the final percentage of change, i.e. 32%.

Thus, there is total 32% change in product prices since the base year.

To Measuring Inflation

To Measure Deflation

To Adjust Cost-of-Living

The Consumer Price Index (CPI) also helps adjust Cost-of-Living. This cost of living index comprises food, shelter, energy, healthcare, transportation, clothing, childcare, and more. The cost-of-living index helps determine Social Security benefit amounts and compares expenditures from one location or geographic region to another. This adjusted cost of living data obtained from CPI helps employers increase the salaries paid to workers.

In a nutshell, Consumer Price Index is a term used to measure inflation in an economy. Since CPI determines the value of money, it sets a particular base for every transaction. Knowing how CPI is used may help consumers and businesses to foresee an inflationary situation and make well-versed economic decisions.