Consumer Price Index

AuthorG. Maxwell
Pages147-149

Page 147

The consumer price index (CPI) provides a method for calculating the price changes that consumers and household managers face over a stated period. Even though the CPI focuses primarily on consumer prices, its calculations are also of great direct value to governmental and business groups. Yet, at the same time, the CPI is the most commonly used price-level indicator. The CPI is a nationwide measure of a weighted measure of prices. It has the capability of consistently measuring changes in prices over periods.

The CPI serves two population groups: urban wage earners (CPI-U) and clerical workers (CPI-W). The CPIU represents about 87 percent of the U.S. population and is based on the expenditures of all families living in urban areas. The CPI-W is a subset of the CPI and is based on the expenditures of families living in urban areas who meet additional requirements. At least one person in the family has to earn more than one-half of the family's income from clerical or hourly wage occupations. The CPI-W represents about 32 percent of the total U.S. population.

COST-OF-LIVING INDEX

Occasionally the term cost-of-living index is substituted for the term CPI. Nevertheless, to take in all the factors of paying to live would require the inclusion of calculations including every consumer's goods and services. Thousands of items are already included, and sheer volume forbids including all of them.

CONSTRUCTION OF THE CONSUMER PRICE INDEX

The basic CPI is calculated monthly by the U.S. Bureau of Labor Statistics. To construct the CPI, a theoretical market basket is filled with several thousands of carefully selected goods and services that reflect amounts and types of purchases by consumers. The purchases made will be included in the calculations on a sample basis. The sample data come from interviews with several families selected at random from the two population groups: CPI-U and CPI-W.

Page 148

The goods and services are divided into more than 800 categories and then arranged into eight major groups: food and beverages, travel, apparel, transportation, medical care, recreation, education, and communication.

In an overly simplified example, the CPI would work like...

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