Consumer Price Index or CPI is a comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy.
CPI reflects the prices of our consumption basket rather than that of goods sold in the wholesale market.
Formula to calculate CPI.
The base year serves as a benchmark year against which future years are compared.
Example:
Assuming the weighted average prices according to consumers’ spending preferences in 2000 was 45 while the weighted average prices in 2005 was 50. Taking 2005 as the base year, determine the CPI.
Therefore, the CPI in 2000 is 90 as compared to 100 in 2005. This tells that there is no deterioration in the purchasing power of the people. In fact, it shows that there has been a inflation.
