The Consumer Price Index, CPI, is a basket of goods and services purchased by the typical urban consumer.

The CPI measures the “cost of living” by comparing the price of the market in the base year to all other years.

The CPI uses a market basket purchased by the typical urban consumer. The market basket is divided into eight categories.

Those categories are:1. Housing 42% of the basket2. Transportation 17% 3. Food and Beverages 15% 4. Medical Care 7%5. Education and Communication 6%6. Recreation 5%7. Apparel 4%8. Misc. 3$

The following is an example of some of the items found in each of the categories of the CPI.

This list is NOT inclusive. It is only used to give a brief overview of some of the goods found in the basket.

Housing

The CPI uses “equivalent rent” to compute housing prices. Equivalent rent is simply what homeowners would pay if they were renting their homes .

House Furniture

Electricity

Transportation

Some of the items placed in the CPI basket for transportation include spending on used and new cars, gasoline, and airline transportation

Food and Beverage

The food and beverage category contains the types of foods and beverages the typical urban consumers purchases and also includes eating out

Health Care (Medical)

Some of the items placed in the CPI basket for health care includes spending on health insurance, glasses, and prescription drugs

Education and Communication

Some of the items placed in the CPI basket for education and communication include spending for tuition, cell phone service, and computers

Recreation

Some of the items placed in the CPI basket for recreation includes spending on books, bikes, and admission to concerts, etc.

Apparel

Some of the items placed in the CPI basket for apparel includes spending on men's clothing and women's clothing

Miscellaneous

Some of the items placed in the CPI basket for miscellaneous include haircuts and styling and tailoring services

So all the goods and services are added up and put in the market basket.

Transportation

Housing

Food and Beverages

Education and Communication

Medical Care

RecreationApparel

Miscellaneous

What we do with the basket is compare it to the cost of the

basket in other years.

2012: $7,000 2013: $7, 500 2014: $8,000

Remember that the CPI is an INDEX NUMBER so we need to convert the market basket price to an index number.

To do this we must choose a base year to compare the cost of the other baskets to.

2012: $7,000

Let’s use 2012 as the base year

The formula for the CPI is simply:

Base Year

Current Year

100

Base Year

Current Year

100

Calculating the Index Number when the base year is also the current year

$7,000

$7,000

($7,000/$7,000) x 100 = 100

The index number when the base year is the current year is ALWAYS 100

Base Year

Current Year

100

Calculating the Index Number when the current year is 2013 (current year cost of market basket is $7,500)

$7,000

$7,500

($7,500/$7,000) x 100 = 107.14

Base Year

Current Year

100

Calculating the Index Number when the current year is 2014 (current year cost of market basket is $8,0000)

$7,000

$8,000

($8,000/$7,000) x 100 = 114.28