• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Penpoin.

Better Knowledge. Your Insight Is Sharper

  • Business
    • Business and Strategy
    • Marketing
    • Operation
    • Human Resources
  • Finance
    • Financial Analysis
    • Investment
  • Economics
    • Introduction to Economics
    • Microeconomics
    • Macroeconomics
  • Online Learning
    • Coursera
    • Udacity
    • Udemy
    • Skillshare
    • Magoosh
  • Reading List
    • Self-Help
    • Business and Money
You are here: Home / Macroeconomics / Consumer Price Index: Meaning, Components, Why It Matters

Consumer Price Index: Meaning, Components, Why It Matters

Updated on April 12, 2022 by Ahmad Nasrudin

Consumer Price Index Meaning Components Why It Matters

The consumer price index is a price index for a basket of goods and services purchased by consumers. To construct it, the statistical bureau determines the relative importance (determining weights) of products and services in household expenditure in a given base year. After the basket composition is selected, the bureau monitors prices for the following years and calculates the price index.

Basket composition and weights in the index usually change after a few years. The aim is to reflect better the goods and services that consumers buy. For example, smartphones are not part of the household budget in the base year, so they are excluded from the basket of goods. However, because many consumers have already bought it, it is included in the latest revision.

Components

Components and weights of goods and services vary between countries. In Indonesia, for example, the statistics bureau classifies products and services into categories such as food and beverage, housing, clothing, transportation, medical services, recreation, education, and communication. Also, the bureau categorizes it into three groups: core components, administered prices, and volatile goods components.

The following is an example of the consumer price index in Indonesia:

Component 2010 2011 2012 2013 2014 2015 2016 2017 2018
Food material 147.39 152.76 161.44 179.77 126.76 133.01 140.58 142.35 147.21
Prepared Food, Beverages, Cigarettes and Tobacco 132.59 138.57 147.04 157.99 118.84 126.47 133.27 138.74 144.17
Housing, Water, Electricity, Gas and Fuel 119.79 123.95 128.1 136.07 115.55 119.41 121.68 127.93 131.04
Clothes 126.76 136.35 142.72 143.46 106.49 110.14 113.5 117.95 122.18
Medical treatment 115.86 120.79 124.3 128.9 111 116.9 121.48 125.11 129.04
Education, Recreation and Sports 117.86 123.94 129.16 134.21 110.37 114.75 117.88 121.81 125.65
Transportation, Communication and Financial Services 106.1 108.14 110.52 127.5 127.27 125.32 124.42 129.68 133.78
Consumer price index 125.17 129.91 135.49 146.84 119 122.99 126.71 131.28 135.39

Calculating inflation rate from the consumer price index

The consumer price index is the most-widely-used price index to measure inflation. Its changes measure changes in the cost of living of the people, which is one of the objectives of government policy.

Alternatives of CPI are the GDP deflator and the producer price index. The GDP deflator measures all goods and services in the economy, including those not bought by consumers such as capital goods. Meanwhile, the producer price index measures the prices of production inputs.

To calculate the inflation rate, we compare the percentage change in CPI over time. The formula is as follows:

Inflation rate = [(CPIt / CPI(t-1)) – 1] * 100%

Let’s take the data in the table above. The inflation rate in Indonesia in 2018 is equal to 3.1% = [(135.39 / 131.28) -1] * 100%.

Core inflation

Some items, such as food and energy, are very volatile. The price changes often do not reflect the fundamentals of demand and supply. Sudden shocks due to natural disasters or increased geopolitical tensions could result in drastic changes in the prices of these goods.

The consumer price index that excludes those items is called the core consumer price index (core CPI). Inflation based on core CPI refers to core inflation. Policymakers such as central banks usually focus on core inflation rather than CPI inflation.

Importances

Some central banks use CPI inflation, especially core inflation, as an anchor for monetary policy. When inflation rises sharply, the central bank will try to decrease it by raising interest rates. Likewise, when inflation is too weak or even deflation, the central bank responds by lowering interest rates.

In the inflation targeting policy, the central bank will try to meet a specific inflation target. For example, in Indonesia, the inflation target in 2019 is 3.5 ± 1%. The central bank will align its monetary policy to achieve these targets.

CPI inflation is a reference for determining wages. Companies usually raise wages to adjust for rising CPI inflation. CPI inflation is also used in financial markets such as Treasury Inflation-Protected Securities (TIPS) in the United States.

Topic: Consumer Price Index, Price Index Category: Macroeconomics

AFFILIATE

If you click on this link, thank you for contributing to us. We may earn a commission when you buy through our links. Learn more ›

5 NEW ARTICLES

How to Handle and Resolve Stakeholder Conflicts

How to Handle and Resolve Stakeholder Conflicts

Stakeholders have different interests and goals, which are often contradictory. Stakeholder

What are the Benefits of International Trade

What are the Benefits of International Trade?

Increased access to cheaper and more varied goods and services is key benefits of international

Where Do Comparative Advantages Come From

Where Do Comparative Advantages Come From?

The comparative advantage stems from the ability to produce goods and services at low opportunity

What is the Capital Budgeting Process

What is the Capital Budgeting Process?

In simple terms, the capital budgeting process involves generating ideas, making proposals about

Autarky Examples, Pros, and Cons

Autarky: Examples, Pros, and Cons

What's it: Autarky is a system or philosophy in which an economy seeks to

Primary Sidebar

  • "The Self-Love Workbook for Women" by Megan Logan
    "The Self-Love Workbook for Women" by Megan Logan
  • "It Didn't Start with You" by Mark Wolynn
    "It Didn't Start with You" by Mark Wolynn
  • "101 Essays That Will Change the Way You Think" by Brianna Wiest
    "101 Essays That Will Change the Way You Think" by Brianna Wiest

Footer

5 TRENDING ARTICLES

  • Socio-cultural Factors: Examples and How They Impact Business
  • A Note on Stakeholder Conflict: Examples, Reasons, and Solutions
  • Business Size: Definition, Measurement, Classification
  • The Role of Business in Society and the Economy
  • What Are the Effects of Industrialization? [Positive and Negative Impacts]

EXPLORE MORE

CATEGORIES

Accounting and Finance Books Business and Strategy Financial Analysis Human Resources Investment Macroeconomics Marketing Microeconomics Operation

TOPICS

Aggregate Demand Business Management Demand Financial Analysis Financial Ratio Government Budget International Trade Leadership Macroeconomic Equilibrium Marketing Marketing Management Organizational Structure Profitability Ratio

Copyright © 2023 · About Us  · Privacy Policy and Disclaimer  ·  Affiliate Disclaimer  ·  Terms of Use  ·  Comment Policy  ·  Contact Us