8.5 The Consumer Price Index and the Inflation Rate

Notes

Inflation is a general rise in prices over time. Deflation is a general fall in prices.

• The Consumer Price Index (CPI), published by the Bureau of Labor Statistics, tracks the cost of a fixed market basket of goods and services bought by typical urban consumers.
• $\displaystyle CPI = \frac{\text{cost of basket in current year}}{\text{cost of basket in base year}} \times 100$. The base year's CPI is 100.
• Inflation rate $\displaystyle = \frac{CPI_{\text{new}} - CPI_{\text{old}}}{CPI_{\text{old}}} \times 100\%$.
• Worked example: a basket costs $200 in the base year and $230 now. $\displaystyle CPI = \frac{230}{200} \times 100 = 115$, meaning prices are $15\%$ higher than in the base year. If the CPI rises from 240 to 252, the inflation rate is $\displaystyle \frac{12}{240} = 5\%$.
• To compare prices across years, adjust for inflation: an item that cost $10 when the CPI was 100 would cost about $15 at a CPI of 150.