How to calculate the CPI and inflation rate:
Firstwe need to know how much of each good were purchased each year and what theprices were:
Hamburger Jeans MovieTicket
1984Price $.80 $24 $5.00
1984Quantity 40 1 4
Thenfind total expenditure by multiplying price timesquantity and adding them:
Expenditure = (.80 x 40) + (24 x 1) + (4 x 5)= $75
$32 + $24 + $20 = $75
Now,20 years later, we have new prices:
2004: Hamburger Jeans Movie Ticket
$1.20 $30 $7.00
Assumethat the market basket (the amount purchased) stays the same in 2004 as it wasin 1984 and the only thing that’s changed are prices. Now what does that market basket cost in2004? Use 1984 prices and 2004quantities.
(TheBLS assumes the same market basket each year)
($1.20x 40) + ($30 x 1) + ($7 x 4) = $106
$48 + $30 + $28 = $106
Tofind the CPI in any year, divide the cost of the market basket in year t by thecost of the same market basket in the base year.
TheCPI in 1984 = $75/$75x 100 = 100 The CPI is just an index value and it isindexed to 100 in the base year, in this case 1984.
Tofind the CPI in 2004 take the cost of the market basket in 2004 and compare itto the same basket in 1984:
CPIin 2004 = $106/$75 x 100 = 128.0
Nowwe can calculate the inflation rate between 1984 and 2004:
(128 – 100) /100 = 28/100 = 28%
Soprices have risen by 28% over that 20 year period. If the period was 1984 to 1985 we would saythat inflation was 28% in 1985.
Nowsuppose that we know that the CPI in 1972 was 37.5 (where 1982 = 100) and thatgasoline costs 36 cents per gallon. TheCPI in 2004 is 188.9. The 36 cents is anominal figure. In 2004 dollars, whatdid gasoline cost in 1972?
Pricein dollars of the original year x (Price level in 2004/Price level in originalyear)
36cents x (188.9/37.5) = .36 x 5.03 = $1.81
So36 cents in 1972 is the same as $1.81 in 2004 dollars. Gasoline is about $1.95 today so it is only a 14 cents more expensive than it was 34 yearsago.
Youcan find a calculator that does this automatically at http://minneapolisfed.org/Research/data/us/calc/index.cfm
---ArtWoolf
February25, 2005
FAQs
To calculate CPI, or Consumer Price Index, add together a sampling of product prices from a previous year. Then, add together the current prices of the same products. Divide the total of current prices by the old prices, then multiply the result by 100.
What is the formula for calculating the CPI? ›
To calculate CPI, or Consumer Price Index, add together a sampling of product prices from a previous year. Then, add together the current prices of the same products. Divide the total of current prices by the old prices, then multiply the result by 100.
How do you calculate inflation rate? ›
You will subtract the starting price (A) from the ending price (B) and divide it by the starting price (A). Then multiply the result by 100 to get the inflation rate percentage.
What is the CPI inflation calculator? ›
The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913.
What is the CPI and how does it measure inflation? ›
The Consumer Price Index (CPI) consists of a family of indexes that measure price change experienced by urban consumers. Specifically, the CPI measures the average change in price over time of a market basket of consumer goods and services.
What is the current CPI rate? ›
US Consumer Price Index is at a current level of 313.22, up from 313.21 last month and up from 303.36 one year ago. This is a change of 0.01% from last month and 3.25% from one year ago.
How do you calculate expected inflation rate? ›
The Fisher equation states that i = r + E(π), where i is the nominal interest rate, r is the real (or, inflation-adjusted) interest rate, and E(π) is expected inflation. Rearranging, we get the formula E(π) = i - r. Traditional Treasuries promise to pay a specified dollar amount at some point in the future.
How is the CPI inflation rate calculated? ›
The current cost of the basket is compared to its cost in the prior year, and then multiplied by 100 to determine the percentage.
What's the US inflation rate right now? ›
Basic Info. US Inflation Rate is at 3.27%, compared to 3.36% last month and 4.05% last year. This is lower than the long term average of 3.28%.
What is the annual inflation rate for the CPI? ›
The annual inflation rate for the United States was 3.3% for the 12 months ending May, compared to the previous rate of 3.4%, according to U.S. Labor Department data published on June 12, 2024. The next inflation update is scheduled for release on July 11 at 8:30 a.m.
The Consumer Price Index measures the overall change in consumer prices based on a representative basket of goods and services over time. The CPI is the most widely used measure of inflation, closely followed by policymakers, financial markets, businesses, and consumers.
Are CPI and inflation rate the same? ›
While the CPI measures price changes, cost-of-living inflation is the change in spending by households required to maintain a given standard of living.
What are the two factors that complicate the calculation of the inflation rate? ›
If you do not necessarily purchase an identical fixed basket of goods every year, then an inflation calculation based on the cost of a fixed basket of goods may be a misleading measure of how your cost of living has changed. Two problems arise here: substitution bias and quality/new goods bias.
What is the formula for the real price CPI? ›
The formula below calculates the real value of past dollars in more recent dollars: Past dollars in terms of recent dollars = Dollar amount × Ending-period CPI ÷ Beginning-period CPI. In other words, $100 in January 1942 would buy the same amount of "stuff" as $1,233.76 in March 2005.
What is the percentage formula for CPI? ›
The percentage change can be calculated by dividing the change in index points by the earlier time period price index multiplied by 100.
What is the formula for the CPI quizlet? ›
CPI is used to measure inflation. The formula is (price in a specific year/price in the base year) *100. Inflation rates that meet the public's expectations. An inflation rate that is higher than anyone expected.
What is the formula for CPI earned value? ›
The cost performance index (CPI) is a measure of the conformance of the actual work completed (measured by its earned value) to the actual cost incurred: CPI = EV / AC.
