Consumer Price Index

Consumer Price Index is also known as the cost of living index.

It represents the average change in price over a period of time, paid by a consumer for a fixed basket of goods and services.

Uses of CPI:

• It indicates the changes in the consumer prices.
• It evaluates the purchasing power of money.
• It is also used for comparison purposes.

Limitations of CPI;

• CPI focuses on a fixed basket, as consumer behaviour cannot be predicted, we can’t be very sure about CPI value to be relevant.
• Quality is not considered while calculating the CPI.
• Inflation effects are not taken into consideration as the basket is fixed.

CPI can be computed using 2 methods:

• Aggregate Expenditure method

CPI = (Total expenditure in current year/Total expenditure in base year)*100; which means;

CPI = Σp1q0/Σp0q0 * 100

• Family Budget method

CPI =  ΣWP/ ΣW

Where P = p1/p0 * 100