Consumer Price Index (CPI)Financial Dictionary -> General Finance -> Consumer Price Index (CPI)
Weighing data and price data are used to construct this index. The first comes as prognoses of the shares of various types of expenses in the total expenses covered by the index. They are generally based on expense data gathered from surveys for a sample of households. Price data is collected for a representative sample of goods and services from a sample of outlets in given locations for set periods of time. Some of the item sampling for collecting prices is done by means of a frame and methods based on probabilities. In this way, confidence intervals cannot be estimated, meaning that one cannot determine what percent of the items is exempt from the statistical rule. Usually, the index is calculated on a monthly basis. As it consists of sub-indexes, these are compared month by month, combined into higher levels and into the total index.
The weights of the index relate to the components of expenses over the current month and the price-reference month. This can be used to estimate the cost-of-living index and show how consumer expenses would have to move and make up for price changes, permitting consumers to sustain a constant standard of living. Estimates can only be computed in retrospect, while the index appears monthly and, ideally, as soon as possible.
The index coverage is limited in scope. For one, consumer expenses abroad cannot always be included for obvious reasons. The rural population is not always covered as well. Groups at the two extreme ends - the very poor and the very rich - are sometimes excluded. The CPI is thus primarily based on the consumption of the middle class.
Economists believe that the so-called "opportunity" cost, the money paid by a consumer for a given service such as renting an apartment, should be part of the CPI. This is the amount a consumer forgoes to live on the premises. The Consumer Price Index is dependent on the amount and variety of goods and services consumed.
It is important to note that CPI does not take into account the possibility that customers switch to less expensive or less desired goods when the cost of food products rises. In 1999, the Bureau of Labor Statistics introduced a geometric mean formula that took into account the shift toward products that had gone down in relative price. However, critics claimed that by accounting for substitution, the Bureau subtracted some amount of inflation individuals can cope with.
Finally, the Bureau of Labor Statistics calculates the Consumer Price Index in the same way as other nations in the European Union and OECD. The rental equivalence is the preferred method to evaluate the cost of shelter, with thirteen out of thirty OECD nations employing it. The second most common method is to exclude the same from the Index. Over eleven OECD nations have opted for this quality adjustment method, with five being G-7 nations.