Consumer Price Index Consumer Price Index (CPI)(CPI)

CPI

•Measure of the average rate of price change for a fixed group of goods and services bought by Canadian consumers.•Measures inflation

Calculating CPI

•Obtained by comparing, through time, the cost of a fixed basket of commodities purchased by Canadian consumers in a particular year•CPI has a base year that everything gets compared to

CPI• Let’s set our base year in 2000• Our basket of goods has 1 loaf of

bread• This loaf of bread costs $1.00 in

2000. The index value is 100.• In 2001, the bread is now $1.25.

Now, the price index is 125.• In 2002, the bread now costs

$1.31. Now our price index in 2002 is 131.

Year – Price Index Value

• 2000 – 100• 2001 – 125• 2002 – 131• 2003 – 133• 2004 - 137

Calculate Inflation Between 2003 & 2004

• (P2 – P1)/P1 x 100• (137-133)/ 133 x 100 = 3%

• CPI this year – CPI last year x 100 CPI last year

Another example:

• Using inflation to calculate consumer price index

Calculate the price index

•If index for January 2000 was 119.8 (1990 = 100)

•Inflation between Jan 2000 and Feb 2000 is 2.1%

•Then February index will be:•119.8 x 1.021 = 122.3 (1986=100)

CPI Exercise

•Year CPI1970 24.21975 34.51980 52.41985 75.01990 93.31995 104.2

CPI ExerciseA family of four had an income of 18 500 in 1985a) approximately what income would they need in 1995 to have the same standard of living

CPI ExerciseA)•(104.2-75.0)/75.0 x 100 = 38.93% = inflation between 1985 and 1995

Prices in 1995 = 18500 x 1.3893

= 25702.15

Another way to get the same answer

Use of cross multiplication:

7575 = 18500

76104.2 ?

104.2 x 18500 ÷75 = 25702.67Due to rounding issues, the answers are slightly different. However, both method/answers are

acceptable.

CPI Income

1985 75 18500

1995 104.2 ?

http://www.rateinflation.com/inflation-rate/canada-inflation-rate