The consumer price index (CPI) measures the price changes of a product over a given period and is used as an indicator of both the cost of living and economic growth. It is calculated by taking into consideration the prices of the goods and services in common use that form a basket. The latter is defined according to the habits of the average consumer. This article explains how to calculate the CPI.
Steps
Method 1 of 2: Calculate the CPI of a Champion
Step 1. Find the previous price record
Last year's supermarket receipts are perfect for this purpose. To obtain precise data, consider a sample of prices relating to a short period of time; for example, one or two months of the year before.
If you are using old receipts, make sure they are dated. Knowing only the prices does not allow you to get a real view of the trend. Changes in CPI are relevant only if calculated for a specific quantifiable period
Step 2. Add up all the prices of goods you bought in the past
Using last year's purchase records, add up the prices of all items in the sample.
- Generally, the CPI only refers to the goods and services most used by consumers - food such as milk and eggs or other products such as laundry detergent and shampoo.
- If you are using the records of your purchases and are trying to determine the overall price trend and not just that of a single product, you can exclude the goods you buy occasionally.
Step 3. Find the current price record
Also in this case, receipts are fine.
- If you are considering a relatively small basket, you may find the prices on advertising flyers distributed by retailers.
- For comparison purposes, it might be useful to always consider the prices of the same products, of the same brand and purchased in the same store. Since the cost of goods can vary by retailer and brand, the only way to monitor for fluctuations over time is to minimize the impact of these variables.
Step 4. Add up all the current prices
You must use the same list of goods that you added up the past prices for. For example, if there is a loaf of bread in the first list, it must also be present in the second.
Step 5. Divide current prices by last year's prices
For example, if the total price of the current basket is 90 euros and that of last year's basket is 80 euros, the result is 1.125 (90 ÷ 80 = 1.125).
Step 6. Multiply the result by 100
The standard value for the CPI is 100 - this means that the initial benchmark, when compared to itself, is 100% - and ensures that the data is comparable.
- Think of the CPI as a percentage. The above prices represent the base, which is described as 100% of itself.
- Using the example above, current prices should be 112.5% of last year's.
Step 7. Subtract 100 from the new result to find the variations
In this way, you subtract the baseline - represented by the number 100 - to evaluate the change over time.
- Using the previous example again, the result is 12.5, which represents a 12.5% price change over the defined time frame.
- Positive results indicate an increase in the rate of inflation; the negative ones are deflation (a rare phenomenon in most of the world since the mid-twentieth century).
Method 2 of 2: Calculate the Price Changes of a Single Good
Step 1. Find the price of a single asset you have bought in the past
Consider an item for which you know the exact cost and which you have also recently purchased.
Step 2. Find the current price of the same asset
It is best to compare two identical items from the same brand that you bought in the same store. The purpose of the CPI is not to determine how much you have saved by shopping in different stores or by choosing private label products.
Also, you should avoid comparing items on sale. The official calculation of the CPI made by ISTAT takes into consideration a large basket of goods and services purchased throughout the national territory, to avoid short-term fluctuations. Calculating the price change of individual items can still be useful, but products on sale are a variable that should be eliminated
Step 3. Divide the current price by the previous price
If a box of cereal used to cost € 2.50 and now costs € 2.75, the result is 1, 1 (2, 75 ÷ 2, 50 = 1, 1).
Step 4. Multiply the quotient by 100
Since the standard value for the CPI is 100 - that is, the initial benchmark, when compared to itself, is 100% - the data are comparable.
Using the above example, the CPI is equal to 110
Step 5. Subtract 100 from the CPI to determine the price change
In this case, 110 minus 100 equals 10. This means that the price of the particular good under consideration has increased by 10% over the given period.
