The Consumer Price Index: What Does It Mean? (UMAP) 4th ed.

EDITOR'S NOTE: This is the 4th edition of a Module that was originally published in Vol. 4, No. 3 of this Journal, in 1983. We are grateful to the authors for updating it as needed over the intervening 30 years.

We define index numbers. We show how the CPI is constructed and used as an index to measure both inflation and the value of the dollar. We also show how the CPI can be used to adjust other economic series to eliminate the effects of inflation. Finally, we describe other important uses of the CPI.

The news media often refer to the Consumer Price Index (CPI) as a measure of the state of the national economy or of inflation. Many people are affected by changes in the CPI because wages or benefits are often linked to it. Although many are familiar with the term, its meaning is not always fully understood. As a result, the general population does not necessarily comprehend its strengths and limitations as a measure of the economy. The purpose of this module is to explain how the CPI is calculated. It is an "index"-a mathematical concept used to measure over time the change of quantities in Economics and other fields. Understanding the CPI also allows one to have a basic grasp of many other indexes used in a variety of applications.

Table of Contents:

1. INTRODUCTION
2. THE IDEA OF MEASURING CHANGE
3. A COST-OF-EDUCATION INDEX
4. THE CONSUMER PRICE INDEX
5. THE VALUE OF THE DOLLAR
6. INFLATION
7. ADJUSTING OTHER ECONOMIC SERIES
8. MEASURING THE COST OF LIVING
8.1 The Laspeyres Index
8.2 The Paasche Index
8.3 Substitution
8.3.1 The CPI-IU-XG Index: Based on the Geometric Mean
8.3.2 The C-CPI-U Index: A Chained Index
9. CONCLUDING REMARKS
REFERENCES
10.ANSWERS TO EXERCISES
11.MODEL EXAM
12.ANSWERS TO MODEL EXAM
13.APPENDIX
ABOUT THE AUTHORS