What is Consumer Price Index?
Consumer Price Index (CPI) is a measure that tracks the average costs of goods and services in a particular sector over a given time. For example, you can have a CPI for medical care, transportation, food, tech, etc. The U.S Bureau of Labor Statistics publishes the CPI every month.
How does CPI work?
It would be difficult to analyze prices’ movements of goods and services over time. This is why the consumer price index is used to help in quantifying the movement of the price over time.
This index is used to calculate the purchasing power of a country’s currency by quantifying the aggregated price level of its economy. The USA started using the consumer price index in 1913 and has been reporting it every month, according to Investopedia.
You can see from the image below taken from the U.S Bureau of Labor Statistics, how many economic sectors performed over the last 12 months.
From the graph above, you can clearly see that there is a change in many sectors. Some sectors grew more than others. For example, the Index of food grew more than other sectors whereas the energy sector suffered the most.
This huge difference can be attributed to the coronas virus pandemic, economic instability, and trade wars around the globe.
Before and during the pandemic period, consumers shifted their priorities to food and related items. This is why the food sector performed better than many other sectors. According to the US. Bureau of Labor Statistics, consumer prices for food at home increased by 4.8% for the year ended May 2020.
At the same time, the pandemic together with oil wars plummeted prices of energy and oil-related products. This is why the energy sector did poorly compared to other sectors of the economy during the same period.
Why is the CPI important?
The CPI is very important as it shows the economic strength of countries. It helps governments, businesses, and individuals to know how the economy is doing and proper measures to take if the economy is not doing well.
The following are some of the benefits of CPI.
- It helps in measuring the inflation and deflation
- It is used in the adjustment of the cost of living
