Consumer Price Index (CPI)

ConsumerPrice Index (CPI)

ConsumerPrice Index

Severalfactors are observed in a society that can be used to determine theirstandard of living against a base – especially a previous periodmeasurement of the same factors. Some economists have used the as a measure of the standards of livingacross time periods. This paper is research into the CPI thatincludes its definition, explanation of the concept and an analysisof whether it is an absolute measure of the standards of living.

TheConsumer Price Index is a statistical measure of the cost of livingthat compares the current prices of a predetermined basket ofconsumer goods and services against its prices in a previous period.Changes in the cost of living of a country can be expressed regardingthe movements in purchasing power of its currency and the inflationrate. The Government computes this statistic through its agencies soas to determine the state of the economy and what necessary controlmeasures are required in the form of monetary or fiscal policies(BLS,2017). In the US, The Bureau of Labor Statistics calculates andreports two monthly CPI’s – CPI-U and CPI-W for the urbanconsumers and the urban wage earners and clerical workersrespectively.

TheCPI is computed by comparing the weighted average of changes in theprices of pre-selected goods and services that constitute the‘basket’ across time – monthly in the US. Different weights aregiven to the separate goods and services in the basket based on theirindividual contributions to the total household expenditure. Theinput of each item to the overall consumption can be estimated fromthe Consumer Expenditure Survey conducted annually. Annual revisionof weights used for the different basket items ensures that changingconsumer tastes and preferences do not affect the statistic(Statistics Mauritius, 2015). The basket contains items like foodand beverages, housing, apparel, transportation, Medicare, educationand communication among other goods and services. The table belowrepresents the broad category of the goods and services contained inthe basket and their respective assigned weights in 2016 (OECD,2017).

TheCPI is calculated for the urban consumers including professionals,business people, unemployed and the retired among others. Thisstatistic excludes the buying habits of people in the rural settings,the army members, and the institutionalized population. Urbanconsumption is measured using two CPI’s based on the broadcategorization of the population – CPI-U and CPI-W. The CPI-U iscalculated to represent the urban consumers that constituteapproximately 89 percent of the overall consumption. The CPI-W, onthe other hand, uses the consumption of a segment of the urbanconsumers with two unique traits than the ordinary urban consumer. Toqualify as a consumer under the CPI-W, half of the household incomeshould be from a clerical employment. Also, at least a member of thehousehold must have been employed for a minimum of 34 weeks in theyear under observation.

TheCPI is not a full measure of the standards of living of thecommunity. This is because, in addition to the prices, the consumer`slevel of utility derived from a particular value of consumptionshould be measured over time. There are also other governmental andenvironmental factors that determine the standards of livingincluding the state of healthcare, infrastructural development andthe amount of disposable income in the population among others. TheCPI and all other price indices reflect only a part of consumer`sliving standards (BLS,2017).The level of income in the society may have grown more than thechanges in prices over the period of observation. The CPI, in thiscase, will reflect that there is reduced standards of living giventhe increase in general prices which will be misleading. The actualreality is that the consumers have more disposable income to buy evenmore of those goods at the higher prices.

References

OECD.(2017). NationalCPI weights.Retrieved on 4th of April 2017 from,http://stats.oecd.org/Index.aspx?DataSetCode=MEI_CPI_WEIGHTS

BLS.(2017). ConsumerPrice Index.Retrieved on 4th of April 2017 from,https://www.bls.gov/cpi/cpiadd.htm#4_1

StatisticsMauritius. (2015). Householdbudget survey 2012 and the updated consumer price index:Methodological report.Port-Louis: StatisticsMauritius, Ministry of Finance and Economic Development