Consumer price index
Definition
A consumer price index (CPI) is an index used to measure the general price level of an economy at a given time, and hence compare it across different times. It is composed of the prices of a bundle of consumer goods with weights attached to each of the prices. The main purpose of the CPI is to track changes in the price level of an economy: the fractional change in the CPI value over a time period is used to measure the change in the price level. More specifically, the fractional increase in the CPI value over a time period provides a plausible measure of the inflation over that time period.
To compute a CPI at any given time, the following information needs to be specified:
- The bundle of goods, services, and commodities whose unit prices are to be measured
- A method for determining the prices of each of these commodities (e.g., which seller's prices are used? If multiple sellers are used, how is the price averaged?)
- A method for weighting and combining these price data to produce a single numerical value that serves as an index (which can then be compared against the value at other times).
A good CPI tries to use a wide and representative sample of goods, services, and commodities used by consumers in the economy. In addition, there may be many sub-indexes (sub-indices) comprising a subset of these commodities that measure the price level of sub-sectors of the economy or specific classes of commodities. Thus, it may be possible to construct a CPI for electronic goods, a CPI for food items, a CPI for transportation, and so on.
Related notions
- Cost-of-living index: Ideally, a consumer price index should be a cost-of-living index, i.e., it should measure the cost of living.
- CPI bias
- Purchasing power parity
- Core inflation