The Consumer Price Index (CPI).

The most widely used measure of inflation is the consumer price index, also known as the CPl. calculated by the Bureau of Labor Statistics (BLS). The CPI measures the cost of buying a standard basket of goods- at different times. The market basket includes the prices of food. clothing, shelter. fuel, transportation. medical care, college tuition.’ and other goods and services purchased for day-to-day living. Prices on 364 separate classes of goods and services are collected from 23.000 establishments in 87 areas of the country.

Using 1998 as the hasp year, we reset the price of each commodity at 100 so that differences in the units of commodities will not affect the price index. This implies that the CPI is also 100 in the base year l= (0.20 X 100) + (0.50 X 100) + (0.30 X 100)]. Next. we calculate the consumer price index and the rate of inflation for 1999. Suppose that in 1999.

This example the essence of how the traditional CPI measures inflation. The only difference between this simplified calculation and the actual one is that the CPI in fact contains many more commodities and regions. Otherwise, the procedure is exactly the same.