Market Basket and Measurement of Consumer Price Index (CPI)

A market basket is a collection of some fixed goods and services to measure inflation by calculating their prices from time to time. There are different types of market baskets. However, the most common is the basket built for consumer goods. It is called Consumer Price Index (CPI) and published by the Department of Statistics in a country.

Robert S. Pindyck and Daniel L. Rubinfeld term Consumer Price Index as “Cost of living index” and define:

“Ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period.”

After discussing the social impact of the market basket, they design term of “Ideal cost of living index” and define as:

“Cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base year prices.”

The consumer behavior follows preferences and choices of the consumers. However, “Actual price indexes are based on consumer purchases and not the preferences.” (Pyndick)

A Simple Way to Calculate Consumer Price Index

Measuring of consumer price index of a country is a complex business and involves a lot of data and statistics. However, to understand the concept of consumer price index, we can try to simplify it. For example, I take a market basket comprising of bread, apple and textbooks for my kids. I will enter this type of data:

 

 

Price of Every Unit

Item

Quantity Purchased

2010

2011

2012

2013

Bread

60

$5.00

$5.00

$4.00

$4.00

Apple

10 kg

$10.00/kg

$10.00/kg

$11.00/kg

$11.00/kg

Textbook

1

$100.00

$110.00

$120.00

$130.00

Total

 

$115.00

$125.00

$135.00

$145.00

Suppose I am purchasing 60 pieces of bread, 10 kg of apples and 1 textbook every year. When comparison shows a decrease in prices, it is deflation. In case of an increase, it is inflation (isn't too simple?). 

This is one of the simple methods to measure inflation rate:

Rate of Inflation = Py2-Py1/Py1X100

P: Price

y: Year

Rate of Inflation = P2012-P2011/P2011X100

Rate of Inflation =135-125/125X100

Rate of Inflation =8.0%

In our example, there is deflation in the price of bread due to certain environmental and supply demand factors. Overall, the price of the basket is increasing. The inflation rate shows that I need to spend 8% in 2012 for the fixed basket of items in 2011.

To calculate consumer price index we need to take a base year. In some formulas, the price of the year is taken as fixed one related to every subsequent year.

In our example we take 2010 as base year with a value of 100.

(Py2/Py1)X100= ?

2010: (115/115)X100=100

2011: (125/115)X100= 108 (8%)

2012: (135/115)X100= 117 (17%)

2013: (145/115)X100= 126.08 (26.08%)

CPI Publishing Authorities in Different Countries

Different countries have different institutions to publish monthly or yearly consumer price index. A few of the institutions are given here:

 

Country

CPI Publishing Institution

Argentina:

National Institute of Statistics and Census of Argentina

Australia:

Australian Bureau of Statistics

Canada:

Statistics Canada

China:

National Bureau of Statistics of China

Eurozone:

European Central Bank

India:

CPI UNME (Urban Non-Manual Employee) by Central Statistical Organisation, and CPI AL (Agricultural Labourer), CPI RL (Rural Labourer)and CPI IW (Industrial Worker) by Department of Labour.

Iran:

Central Bank of Iran

Malaysia:

Department of Statistics Malaysia

Pakistan:

Pakistan Bureau of Statistics

Thailand

Bureau of Trade and Economic Indices, Ministry of Commerce

USA:

Bureau of Labor Statistics

Vietnam:

General Statistics Office of Vietnam

What are Your Views?

You are welcome with your opinion.

We find value in differences between learning, interpreting and discussions. Please share your thoughts freely about this topic, but remain respectful.

Thanks for your interest!