Consumer Price Index (CPI) reflects the dynamics of the price level for a group of services and goods for a specific reporting period(month, three months, year).
In essence, this indicator reflects changes in the cost of living in a country and refers to early indicators of consumer inflation, while recording changes in the purchasing power of a particular currency. An increase in the consumer price index indicates an increase in the cost of a typical basket of services and goods relative to the base period. And the acceleration of CPI growth indicates an increase in the growth rate of consumer inflation, which often, in conditions of economic growth, is a signal to take measures aimed at tightening monetary policy in the country.
The consumer price index is published, as a rule, monthly and has a pronounced impact on the rates of major world currencies, since it allows economists to accurately determine the state of consumer demand, as well as the direction of government monetary policy.
In this case, the Central Bank often focuses not so much on the actual figures of consumer inflation, but on inflation expectations. That is, if the growth rate of consumer prices is expected to increase in the future, then workers, in order to increase their purchasing power, may begin to demand an increase in their nominal income, which may force companies, in turn, to increase selling prices for goods and services, which will lead to ultimately, to rising consumer prices.
In addition, if companies expect high rates of consumer inflation in the future, they will increase their selling prices, believing that consumer demand will not suffer from this at all. And finally, the impact of inflation expectations on investment and consumer preferences. An increase in inflation rates makes current consumption much more attractive relative to saving money.
The Central Bank's monetary policy, on the one hand, should effectively prevent high rates of inflation, since it is a clear indicator of economic overheating. However, on the other hand, too low indicators of this index can deprive companies of the incentive to invest in production, and households to make “now” purchases. In this light, deflation (a decrease in prices for goods and services relative to last year) poses a great danger to the economy, therefore Central banks everyone is trying to avoid this by launching the process of quantitative easing or reducing interest rates.
When making its decisions, the Monetary Committee very often relies not on the general index, but on the core consumer price index. When calculating it, the indicator does not include changes in prices for energy and food, which are subject to sharp fluctuations due to seasonal and weather factors, as well as the cyclical nature of economic development. The core consumer inflation index, on the one hand, is a more stable indicator, but on the other, the excluded components account for about 25% of the total volume of goods and services included in the CPI calculation, which have a significant impact on other groups of goods.
UN Department of Economic and social issues released the report “World Economic Situation and Prospects for 2015.” According to the report, global economic growth will be just over three percent in 2015 and 3.3 percent in 2016. In the eurozone, however, according to the report's authors, a rare phenomenon of deflation - a decline in the price index - may occur. From the point of view of the average person, this seems to be great news - what could be better than a price reduction? However, is this really so? Nikola Krastev spoke about the report's findings with economist Grigor Agabekyan from the UN Department of Economic and Social Affairs.
GA: The main points of our forecast for 2015 are the expected increase in global economic growth and a slight improvement from the secondary recession, so to speak, that occurred in 2012. More precisely, we're talking about not about a secondary recession, but about a slowdown in economic growth, but at the same time, this growth will be quite modest, a little more than three percent, and it will be quite uneven.
In addition, a lot of uncertainties and risks will remain. There are also some points that should be paid attention to, for example, the rather slow growth in developing countries such as Brazil, India and the slowdown in China.
In addition, there are certain economic and political risks. Let's say we still have to accurately assess - this will be seen in 2015-2016 - what the consequences of normalizing monetary policy in the United States will be. And, in addition, in the leading developed countries, in the countries of the Eurozone and in Japan, rather low growth rates remain.
All this affects the recovery of the labor market, overcoming structural unemployment and the prospects younger generation who completes their education and enters the labor market. Only limited opportunities open to them.
We see a large number of difficulties, and we see the need for different international organizations, of course, including ours, to pursue more active policies to stimulate economic growth and increase employment.
NK: In the Eurozone, the risk of deflation is, from my layman’s point of view, not very explainable, that is, we are talking about a decrease in the price index, and for any buyer this is a good signal. It turns out that this is a bad economic signal. What is deflation?
GA: Yes, of course, this is a bad economic signal. The fact is that this is a decrease in prices, that is, it is a decrease in the consumer price index. If it continues long enough and if this trend becomes serious and long-lasting, then in such cases many consumers may postpone their purchases, especially if we are not talking about everyday purchases, but about some goods that are purchased once a year or once every few years. Expecting prices to drop lower and lower, consumers may defer spending. And this will ultimately lead to a weakening of overall consumer demand. But weakening demand will, in turn, reduce the profitability of companies, lead to postponement of investment decisions and may even lead to people being laid off because companies simply become unprofitable. Many of the consumers are also salaried workers. Accordingly, if there is no demand or profitability for their companies, their own work may be at risk.
Many corporations and individuals have loans that they have taken out from the bank. Since in deflation the nominal wage may also go down, it becomes much more difficult to repay these loans.
In general, deflation puts a certain strain on financial system, leads to certain risks in the labor market and slows down economic growth.
Consumer Price Index, CPI (Consumer price index, CPI) is a price index that is calculated for a certain group of goods and services that determine the composition of the consumer basket of one resident of the country and is calculated for a certain period of time.
For example, in the United States, the consumer price index is calculated by taking 265 goods and services from 85 cities in the country as a basis. In Russia, when calculating, we take the consumer basket, the composition of which is approved Federal law No. 44-FZ “On the consumer basket in general for Russian Federation" It includes food, non-food products, and various services.
Thus, the consumer price index is the ratio of the entire consumer basket of the base year, which is valued in prices current year, to the consumer basket for the base year, which is valued at base year prices.
If we assume that the consumer basket includes only three types of goods, then an example of calculating the indicator will look as shown in the table below.
The Consumer Price Index is one of the most common price indices that plays important role in economics, because is the basic value that serves as an impetus for the recalculation of wages, social benefits and other payments, which should occur regularly and automatically, for example, every quarter, annually or every six months, by organizations that hire workers.
The important role of the consumer price index implies the need to create a unified methodology for calculating this indicator in the economy, which at one time would reflect the degree of change in the price level. For example, when calculating the CPI, only a small and limited number of goods that fall within the minimum level of consumption will be taken into account. Based on this, the price change index will be much lower and wage growth will not compensate for the rise in inflation, which may reduce incentives to work. A similar situation can happen if, for example, the consumer basket includes goods that were produced within the country. In such a situation, when high level centralization, it is necessary to implement a redistribution of rising prices for consumer goods. For example, between goods such as Kalashnikov assault rifles and tarpaulin boots, the prices of which can be artificially reduced by the government of the country.
The calculation method itself also plays an important role. For example, consider the following method for calculating the consumer price index, which is correct from a mathematical point of view and is even recommended for calculating the CPI, but gives a slightly different result than in the case shown above. The formula looks like this:
By determining the share of each group of goods included in the usual consumer basket and substituting prices into the formula, we get:
When calculating indices, statistical accuracy entails the creation of a single base and therefore the consumer price index in a country is based on a single base, which represents the base year's production volume or common shares of goods in the consumer basket. As a result, the CPI does not reflect the impact of price changes on changes in the share of consumption of any good. In addition, the price index cannot estimate what percentage of the price increase is attributed to the qualitative improvement of the product itself. For example, a car from 1960 and a car from 1990 differ significantly in their quality characteristics.
Hello! In this article we will understand the concept of “consumer price index”.
Today you will learn:
- What is the CPI, who calculates it and how;
- Where is the index used?
- How to find out the current CPI.
Consumer price index in Russia 2019
How are things going with the price index in our country at the beginning of 2019?
According to official data from Rosstat,In February 2019, the overall CPI was 100.4%, including for goods – 100.5%, for services – 100.2%, since the beginning of 2019 – 101.0%.
As an example, let’s look at how the composite index changed in the Russian Federation from 2014 to 2018.
Data not only for years, but also for months are in open access on the website of the Federal State Statistics Service. You can view the history of values from 1991 to the current month, not only relative to the previous year, but also to the last month.
It's no secret that statistical offices around the world regularly produce a lot of calculations and studies. Some of them are so important that they can determine the direction of internal and foreign policy, become guidelines for financial institutions and the largest enterprises.
What is the consumer price index
One of these important parameters is the consumer price index, and in English-speaking countries CPI is percentage prices for goods and services at the beginning and end of the billing period.
This indicator illustrates jumps in the average price schedule relative to the base year, and, accordingly, changes in the cost and standard of living.
In Russia, the CPI is calculated and published monthly federal Service state statistics.
Not all goods are indexed, but most retail. In total, the list includes more than 100,000 items.
Core consumer price index
The part of the CPI, for the calculation of which price fluctuations due to situational influences are excluded, is usually called the base one.
The purpose of the base index is to identify price dynamics without the influence of supply and demand shocks, seasonality, and local legislative regulation.
For example, to calculate the BICP, the following are excluded from the consumer basket:
Where is the consumer price index used?
The consumer price index is a very important and informative indicator.
Based on the CPI value, it is easy to understand how citizens’ expenses have changed, provided that the list of purchased goods remains the same.
For example, it is on the basis of the price change index that decisions are made on the recalculation of social benefits, wages, and so on.
The CPI affects interest rates on loans and credits, the refinancing rate, and the cost of bonds. Traders actively monitor the CPI, as they can be used to predict Central Bank rates and the strengthening or weakening of the currency.
Monthly index values ultimately affect exchange rates, since it can be used to determine the purchasing power of the population and predict government policy.
Impact of the CPI on inflation
The consumer price growth index reflects the dynamics of the cost of living of citizens, so it is indispensable when calculating inflation.
Other advantages of the CPI relative to other financial indicators:
- Simple index calculation methodology;
- Monthly construction;
- Timely and accessible publications.
If the index grows, it means that the cost of the consumer basket increases relative to the base value. An index that has reached 100% or more indicates inflation in the country, and as a result, a tightening of monetary policy.
A drop in prices relative to last year indicates deflation, which poses a separate danger for the country’s economy. The Central Bank immediately reacts to this phenomenon by lowering interest rates.
Calculation of consumer price index
The Consumer Price Index is a percentage of how much cheaper or more expensive certain products have become.
Accordingly, the formula looks like this:
Current value of the consumer basket / Value of the basket at the beginning of the period (or in the base year) * 100.
The components of the consumer basket change in step with progress (cellular communications entered it relatively recently), and this also affects the final CPI. Therefore, it is not always possible to objectively compare values from long ago.
The complete list is approved by Federal Law.
Here are some of its component categories:
- Food;
- Cloth;
- Cost of housing and communal services;
- Commercial education;
- Paid healthcare and so on.
Calculation example. Let's assume that the consumer basket of food products includes only bread, milk and butter (in fact, the full working list consists of several thousand items).
Their total current value is 165 rubles. In December of the previous year they cost 160 rubles.
The annual CPI will be equal to: 165 / 160 * 100 = 103,1.
We have an index of more than 100, which indicates a tendency towards inflation.
CPI and GDP deflator
The deflator and the CPI have common task– they are used to calculate inflation in the country. But otherwise, these indicators have noticeable differences.
Even children probably know what prices are. This is the amount of money that we need to pay for the possession of this or that product or to receive this or that service. At the same time, prices can either rise or fall, although in most cases the first option is observed. Those Russians who try to control their expenses, after returning from another planned shopping trip, often not only count the money spent, but also compare how much more or less they spent this time compared to the previous one. States are doing something similar.
The Consumer Price Index is...
In scientific terms, it is a measure of the average change over time in the prices that consumers pay for owning a market basket of consumer goods and services. Simply put, the consumer price index is a change in the aggregate prices for a given period of time for certain sets of goods, without which the government believes its citizens cannot live. To put it even more simply, this is the cost of a normal life for a typical consumer. Thanks to this index, it is possible to determine periods of inflation or deflation, which are reflected in the wallets of consumers who make some purchases every day, and therefore spend their money. In the presence of inflation, the index will grow, and over a very short period - previously they were measured over half a year, but now many governments undertake to draw conclusions even based on data of 1 month. The same goes for deflation, a sustained decline in the prices of goods and services.Where is the CPI applied?
Since this index allows you to track the movement of prices up and down, and it is aimed specifically at the average consumer, this indicator makes it possible to adjust the amount of payments for a certain category of people. For example, those workers whose wages are minimal - the government’s task is to ensure that the gap between such wages and the amount necessary to purchase the monthly consumer minimum is as small as possible. Those who receive certain benefits from the state are also tied to the index, and here the connection is almost the same as with the minimum wage. In the States, even pensions are “tied” to this index - both military and civilian, as well as those who receive food stamps (and there are 22 million of them in the USA). The consumer price index even affects the cost of school lunches.What information is collected for the CPI?
Of course, in order to get an idea of how citizens spend, not all of their categories are taken for sampling. Although almost everyone is present - residents of cities and rural areas, representatives of private business and employees budget areas, professionals, self-employed people, the poor, the unemployed, pensioners. Such samples do not include those who at the time of the analysis were in military service(non-cadre employees), in hospitals, etc. At the same time, as analytical data for the index, the spending of these categories of the population on:- food and drinks;
- housing expenses ( communal payments, rent, mortgage payments, etc.);
- clothes;
- transport (both personal and public);
- medical care etc.
Not included in the calculation of the index is everything that is not an essential necessity for a person (for example, purchasing jewelry), as well as investment expenses - for example, buying some securities or gold from a bank.