How to calculate CPI
The Consumer Price Index (CPI) is used to calculate inflation, which is of major concern to Americans right now with prices being pushed up by the effects of the coronavirus pandemic and now by the shock of the Russian invasion of Ukraine and the sanctions put in place by the US and its allies to try and force Putin to stand down.
The CPI, which is one of the most frequently used measures of inflation, is calculated by looking at the prices of a basket of good and services over time. The calculation is done by taking the price changes for each item in the basket and then averaging that.
As a tiny example over the past year, take a couple of items, say breakfast cereal and a certain model of television.
Breakfast cereal price 2021: $4.50
Standard shirt price 2021: $25
Breakfast cereal price 2021: $5
Standard shirt price 2021: $28
You then divide the current total by the previous total: 33/29.50 = 1.119. Multiply that by 100 to get 111.9, which is effectively a percentage, if you take away 100, so the change in the consumer price index would be 11.9%, that is prices are 11.9% higher now than a year ago.
Actually creating the basket is a major undertaking, as well as ensuring the products are comparing like with like, which can be particularly hard where new models are released or new technology is introduced.
The basket does not include taxes and social security as these are not directly related to goods and services. It does include the following categories, among others:
Food and beverages
Education and communication
Other goods and services