Consumer Price Index Calculation
Have you ever wondered how the CPI, Consumer Price Index is calculated? The CPI is made up of 80 to 90,000 items, each weighted according to it's share of the typical family budget. Groceries make up less than 10% so it's impact on inflation is small when prices rise. Whether you own or rent your home however, accounts for 28% of the index. Any change on the housing market has more of an impact on the CPI than an increase in the cost of lettuce. Additionally, prices for items in the CPI are adjusted to reflect quality changes. For example, the price of a new car is higher, but you're getting more for your money, such as air bags, radial tires and high impact bumpers. According to CPI data, new car prices rose 172% between 1967 and 1995 due to adjustments for technological advances compared to 313% without the adjustment figured in.
Kiplingers Jan 1996
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