Consumer Price Index (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

CPI Exercise Year CPI 1970 24.2 1975 34.5 1980 52.4 1985 75.0 1990 93.3 1995 104.2

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

CPI Exercise A) (104.2-75.0)/75.0 x 100 = 38.93% = inflation between 1985 and 1995 Prices in 1995 = 18500 x 1.3893 = 25702.67

Another way to get the same answer CPI Income 1985 75 18500 1995 104.2 ? Use of cross multiplication: 75 = 18500 104.2 ? 104.2 x 18500 ÷75 = 25702.67 Due to rounding issues, the answers are slightly different. However, both method/answers are acceptable.

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