In earlier article, we can see great impact when there is inflation. So the first step is find a way to measure inflation in order to take any precautionary actions can be taken.
One of the way is to create a price index. This price index is a composite of prices of various goods and services. The higher the price index, the higher the inflation is. This price index is known as Consumer Price Index
The following are some of the salient points of the Consumer Price Index(CPI):
· It is a general price index or level which takes into all essential goods and serves consumed by the public for example, rice, medical , bus fares, rent,etc
- It measures the price of a fixed “basket” of consumer goods, weighed according to each component’s share of an average consumer’s expenditure
- It is a measure of inflation commonly used by all sectors re: government statistical department, economists, media,etc
- It is a statistical device or indicator that reflects the changes in the general price index from the base year to the current year.
- See earlier article on how to calculate the rate of inflation
- CPI figures are extremely critical for decision making as a high CPI means high price levels of goods and services and hence higher inflation which means that the purchasing power of money is declining. Policy makers takes action against inflation after checking the CPI figures.