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CPI calculation: our guide

The Consumer Price Index (CPI) is used to calculate inflationwhich is a major concern for Americans right now, with prices being pushed higher by the effects of the coronavirus pandemic and now by the shock of the Russian invasion of Ukraine and the sanctions put in place by the states States and their allies to try to force Putin to step down.

The CPI, which is one of the most frequently used measures of inflation, is calculated by looking at the prices of a basket of goods and services over time. The calculation is done by taking the the price changes for each item in the basket, then averaging.

As a small example over the past year, take a few items, say breakfast cereal and a certain model of television.

2021 breakfast cereal price: $4.50
2021 standard shirt price: $25
Total: $29.50

2021 breakfast cereal price: $5
2021 standard shirt price: $28
Total: $33

you then divide the current total by the previous total: 33/29.50 = 1.119. Multiply that by 100 to get 111.9, which is actually a percentage, if you subtract 100, so the change in the consumer price index would be 11.9%, i.e. to say prices are 11.9% higher today than a year ago.

In fact basket creation is a major undertaking, while ensuring that products compare, which can be particularly difficult when new models are launched or new technologies are introduced.

The basket does not include taxes and social security as these are not directly related to goods and services. It includes the following categories, among others:

Food and drinks
Medical care
Leisure items
Education and communication
Other goods and services

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