Calculating the CPI The consumer price index (CPI) compares the cost of a market

Question

Calculating the CPI The consumer price index (CPI) compares the cost of a market basket of goods in a given year with the cost of the same market basket in the base year. Suppose that a market basket includes (1) admission for two to a local theatre for a weekend movie, (2) a large box of popcorn at the theatre, (3) a large pepperoni pizza (carry-out from a local pizzeria), and (4) a two-liter bottle of Diet Coke. Assume that Year 1 is the base year. Calculate the value of the CPI for each year and the rate of inflation for Years 2 and 3.

Explanation / Answer

CPI in year 1 = 5*2 + 2*1 + 12*1 + 1.25*1 = $25.25

CPI in year 2 = 6*2 + 2.5*1 + 12.50*1 + 1.40*1 = $28.40

CPI in year 3 = 6.50*2 + 3*1 + 13*1 + 1.50*1 = $30.50

Rate of inflation in year 2= 28.40/25.25-1 = 12.48%

Rate of inflation in year 2= 30.50/25.25-1 = 20.79%

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