Consumer Price Index

Consumer Price Index and Inflation

Ositadinma Bernard Akaeme

Microeconomics Fall 2014

Consumer index in simple terms refers to a statistical measure of a weighted average of the price of a particular set of goods. The consumer price index measures the change in price of this set of goods for a given period. This set of goods is in economics circles referred to as a basket of goods. Some of the goods that can be found in this basket include things such as a food, transportation, education, housing and beverages. For example in terms of food, they may include things such as milk, cereals and so on. Therefore, consumer price index can be referred to as the measure as the average change in the prices of goods and services that consumer pay for and that make up the basket of goods. The Consumer Price Index enables consumers for instance to compare the cost of a basket of goods for this month and the costs for the same basket of food for the previous month. In many economies, the consumer price index serves three primary functions. The first of these is that it is an economic indicator. Secondly, the consumer price index acts as a deflator of the other economic series. Thirdly, the consumer price index influences the foreign currency exchange rates. The percentages that are usually weighted in the food basket are those for housing, food and beverages, transport, medical care, other, apparel and entertainment. The particular percentages assigned to these aspects respectively are 41.4%, 17.45%, 17.0%, 6.9% and 4.4%.

One thing that is associated with the consumer price index and the basket of goods is inflation. In simple terms, inflation refers to the situation whereby there is a continuous and sustained increase in the prices of goods over a period or the fall in the value of the currency of a particular nation. Therefore, a nation going through inflation is characterized by increasing prices of goods and commodities and the falling of value of the local currency...