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Tuesday, January 21, 2014

How Is The Consumer Price Index (CPI) Calculated?

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One knows that the Consumer Price Index has a base Year of 2010-2011.This consists of a number of components as explained above. One notices a price increase in all the components of the index over a period of time. Let us consider a base value of 100 in the year 2010-2011.In the year of 2012-2013 owing to a general increase in all prices and components of the index the value changes to 125.However the knowledge of this movement in values alone does not help us. One has to convert it to a percentage. However if there is too wide a gap between the base year and the current year it would not be a proper representation of the true value. Hence for the year 2013 one would have to replace the base year 2010-2011 by 2011-2012.

[(B)-(A)]/A * 100 Here one has the value of 100 for the base year and A=100 (2010-2011). B=125 (2012-2013).


(125-100) / 100 * 100 =25%.This represents a 25% change in the value of the components of the CPI index over a couple of years.

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