How is CPI measured?
The Consumer Price Index (CPI) is the ratio of the value of a basket of goods in the current year to the value of that same basket of goods in the earlier goods. It measures the average level of prices of the goods and services typically consumed by an urban American family. 15 The purchasing patterns of consumers were surveyed to determine a group of about 400 items or more, which buyers typically use. This group of items makes up a “market basket”. Each month a host of price surveyors checks on the prices of these items in cities across the country. These results are then used to compute what the market basket costs compared to what its cost in the base period. To compute the price index, the cost of market basket in any period is divided by the cost of market basket in the base period is divided by the cost of market basket in the base period and the result is multiplied by 100. The price index tries to give in one number a general picture of what is happening to great many numbers.
