A) What is the CPI and what does it measure? B) What is the rate of inflation in
ID: 1138226 • Letter: A
Question
A) What is the CPI and what does it measure?
B) What is the rate of inflation in 2018 as measured by the CPI?
Given the following relative weights of importance for the major components of the Consumer Price Index or CPI: RIW 2017 2018 Food: Food at home Food away from home Alcoholic beverages 10.1 6.1 1.6 148.4 138.7 148.5 153.3 148.6 151.8 Housing: Residential rent Homeowners rent Furnishings, utilities, etc 5.5 18.1 19.0 165.7 151.2 123.7 155.7 126.5 Apparel and upkeep 6.5 132.0 138.7 Transportation: New vehicles Used vehicles Motor fuel Public transportation Other 5.5 1.4 4.8 1.4 5.7 139.1 128.7 143.0 131.9 115.3 123.1 122.8 121.0 121.3 Medical care Entertainment Other goods and services 4.8 5.1 220.5 153.9 206.9 235.2 159.1 215.4Explanation / Answer
Q. A)
Consumer price index (CPI):
This is the change in weighted-average price between two years of which one is base year (2017) and the other is current year (2018).
It measures inflation or deflation of price of specific basket of goods or services between the base year and current year.
Q. B)
Weighted-average price calculation is as below
Items
Weight (W)
2017 – base year = W × Price
2018 – Current year = W × Price
Food:
At home
10.1
148.4 × 10.1 = 1,498.84
10.1 × 153.3 = 1,548.33
Away
6.1
138.7 × 6.1 = 846.07
6.1 × 148.6 = 906.46
Beverages
1.6
237.6
242.88
Housing:
Resi rent
5.5
911.35
940.5
Home rent
18.1
2,736.72
2,818.17
Fur.
19.0
2,350.3
2,403.5
Apparel
6.5
858
901.55
Transport:
N. Vehicle
5.5
765.05
786.5
O. Vehicle
1.4
180.18
184.66
M. Fuel
4.8
535.68
553.44
Public
1.4
169.4
172.34
Other
5.7
691.41
699.96
M. Care
4.4
970.2
1,034.88
Entertainment
4.8
738.72
763.68
Other
5.1
1,055.19
1,098.54
14,544.71
15,055.39
CPI of 2018 = (Weighted average price of 2018 / Weighted average price 2017) × 100
= (15,055.39 / 14,544.71) × 100
= 103.51
CPI of the base year (2017 here) would always be 100.
Inflation rate = CPI of 2018 – CPI of 2017
= 103.51 – 100
= 3.51% (Answer)
Items
Weight (W)
2017 – base year = W × Price
2018 – Current year = W × Price
Food:
At home
10.1
148.4 × 10.1 = 1,498.84
10.1 × 153.3 = 1,548.33
Away
6.1
138.7 × 6.1 = 846.07
6.1 × 148.6 = 906.46
Beverages
1.6
237.6
242.88
Housing:
Resi rent
5.5
911.35
940.5
Home rent
18.1
2,736.72
2,818.17
Fur.
19.0
2,350.3
2,403.5
Apparel
6.5
858
901.55
Transport:
N. Vehicle
5.5
765.05
786.5
O. Vehicle
1.4
180.18
184.66
M. Fuel
4.8
535.68
553.44
Public
1.4
169.4
172.34
Other
5.7
691.41
699.96
M. Care
4.4
970.2
1,034.88
Entertainment
4.8
738.72
763.68
Other
5.1
1,055.19
1,098.54
14,544.71
15,055.39
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