Intermediate

Consumer Price Index

Measures price levels relative to a base year.

Formula

CPI = \frac{\text{Basket now}}{\text{Basket base}}\times 100

Variables

BasketCost of goods basket

Example

Tracks inflation

How it works

The Consumer Price Index compares how much a fixed "basket" of goods and services costs today with how much the same basket cost in a chosen base year. By dividing the current basket cost by the base-year basket cost and multiplying by 100, the base year is set to 100 and other years show prices relative to that benchmark. A CPI above 100 means the basket is more expensive than in the base year; below 100 means it is cheaper.

When to use it

Use this formula when you want to compare general price levels across time, such as checking how much living costs have changed since a base year. It is also useful in economics, finance, and public policy for adjusting wages, contracts, or income figures for inflation.

Worked example, step by step

Base-year basket cost = $250 Current-year basket cost = $290 CPI = (Basket now / Basket base) × 100 CPI = (290 / 250) × 100 CPI = 1.16 × 100 CPI = 116 So the CPI is 116, meaning the basket now costs 16% more than in the base year.

Common mistakes to avoid

Using the cost of one item instead of a fixed basket of goods and services
Swapping the base-year and current-year values, which reverses the interpretation
Forgetting that the result is indexed to 100, not a percentage change directly

Did You Know?

The Consumer Price Index tracks a fixed basket of goods to measure how the cost of living changes.

macro

Consumer Price Index

Formula

Variables

Example

How it works

When to use it

Worked example, step by step

Common mistakes to avoid

Did You Know?

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