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Consumer Price Index - Changes And People’s Spending Patterns

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Economists, analysts and experts, and the business community assess the economy in several ways, one of which is through the consumer price index.

Changes in the prices of commodities affect how consumers spend their hard-earned money.

Those common commodities that impact the buying decision process when their prices increase or become volatile include food (e.g., rice, sugar, milk), gasoline, and personal items (e.g., clothing).

Governments as well as investors and business owners monitor consumer price index to determine the flow of commerce and the economic decisions to be made.

How the Consumer-Price Index Measures Inflation | WSJ

COPYRIGHT_WI: Published on https://washingtonindependent.com/ebv/consumer-price-index/ by Habiba Ashton on 2022-11-07T19:24:55.084Z

Consumer Price Index Meaning

The consumer price index (CPI) is an index or an indicator used to measure the average level of prices of goods and services in an economy.

According to the Corporate Finance Institute (CFI) in Canada, the CPI is made up of a bunch of goods and services that consumers usually buy or avail of.

This “bundle of goods and service” - the phrase used by CFI - is also the same as what is referred to as the “basket” or “market basket” of goods and services.

Per the U.S. Bureau of Labor Statistics (BLS), the consumer price index consists of the following eight major groups or “consumer expenditures” (in no particular order):

  • Food and Beverages
  • Housing
  • Apparel
  • Medical Care
  • Transportation
  • Education and Communications
  • Recreation
  • Other Goods and Services (e.g., tobacco and smoking products such as electronic cigarettes)

As mentioned earlier, as the price levels of the basket of goods and services change, the spending patterns of consumers also change.

The Consumer Price Index expresses the change in the current prices of the market basket of goods in a period compared to a base period.

- Corporate Finance Institute (CFI)

In the U.S., the BLS conducts a survey on the spending patterns and the goods and services involved. Based on the results of the survey, the CPI will be calculated.

The formula to compute the consumer price index is this:

CPI is equals to the Cost of the Market Basket in Given Year divided by the Cost of the Market Basket in Base Year. The quotient will then be multiplied to 100 percent.

Calculating the CPI is made either every month or every quarter of the year.

A long grocery receipt with several folds lying among miscellaneous grocery items
A long grocery receipt with several folds lying among miscellaneous grocery items

Types Of Consumer Price Index

The consumer price index may vary in each country.

In the U.S., for example, the Bureau of Labor Statistics (BLS) issues two CPIs monthly for two population groups, namely the:

a. Consumer Price Index for All Urban Consumers (CPI-U)

The CPI-U represents an estimated 93 percent of the total population in the U.S. However, it doesn’t include expenditures by those residing in the following places:

  • military bases
  • institutions
  • farm households

b. Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)

The CPI-W represents 29 percent of the country’s population.

In India, the consumer price index are for:

  • Industrial Workers (IW)
  • Agricultural Laborers (AL)
  • Rural Laborers (RL)
  • CPI (Rural/Urban/Combined)
A foreman in a construction site looks at two construction workers near a cement truck
A foreman in a construction site looks at two construction workers near a cement truck

Consumer Price Index USA 2022

In the U.S., consumers experienced an increase in the price levels of the major groups of the consumer price index during the last quarter of 2022.

From a 0.1 percent increase in the CPI in August, it rose to 0.4 percent in September, reported NBC News.

In America, CPI is understood as:

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers.

- Jason Fernando, professional investor and writer, for Investopedia

The table below shows the Consumer Price Index for All Urban Consumers (CPI-U) in the U.S. (September 2022), with data from the BLS (note: figures were rounded off):

Expenditure CategoryRelative Importance
Food13.6%
Energy8.2%
Commodities21.3%
Shelter (Housing)32.5%
Medical care services (Healthcare)6.9%
Transportation services5.9%
Education5.3%
Other Expenses6.3%
Total Expenses100%

People Ask

What Is CPI And Why Is It Important?

The consumer price index is one way to know the economic standing of a country. It is important because it is used to measure inflation and deflation and to deal with cost-of-living adjustments.

Is CPI The Same As Inflation?

CPI and inflation are two different things, but they are interrelated as the former is used to measure the latter.

What Happens When CPI Increases?

When the consumer price index goes upward, the average change in prices increases overtime, according to Investopedia. Cost-of-living adjustments will then follow.

A huge ‘sale’ sign in yellow uppercase letters on a glass panel of a store in Nuremberg, Germany
A huge ‘sale’ sign in yellow uppercase letters on a glass panel of a store in Nuremberg, Germany

Final Thoughts

The consumer price index is basically about consumer spending.

Apparently, people’s expenditures get impacted by the changes in prices. These changes in price levels then affect the country’s cost of living. Changes in the cost of living are connected to the changes in the CPI.

Though the consumer price index receives its share of criticisms, according to Investopedia, it remains to be a reliable economic barometer.

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About The Authors

Habiba Ashton

Habiba Ashton - BCS Growth Fund (Israel) L.P., a private investment fund specializing in investments in technologically focused businesses with high growth potential, employs Habiba as an analyst. Mrs. Ashton served as an analyst and information manager at the Israel International Fund, the first Israeli venture capital fund designed specifically for Japanese corporate investors, prior to joining BCS. Habiba graduated with honors from Israel's College of Management with a B.A. in Business Administration.

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