What exactly is the consumer price index?
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The consumer price index (CPI) is a way of measuring changes in the overall price of things for consumers in an economy.
If the CPI goes up and your income doesn’t then generally you won’t be able to buy as much stuff. Your “real income” has gone down.
The basic way the CPI is calculated is to pick a “basket” of goods representing what a typical household buys: different food items, energy, clothes, electronic, housing (at least in the CPI-H), etc.. Researchers find out typical prices for all these things. Statisticians weight them according to how much people will buy (you’ll buy bread more often than a new TV). That’s your baseline index .
After a period of time – typically a quarter – they measure the prices again index.
The difference between the two sets of prices is the change in the CPI. Usually this is described as an annual change – “the consumer prices index in Q4 2022 was up 10% compared to Q4 2021.”
There are plenty of complications, of course – the basket has to be periodically changed as people change their spending habits, it’s challenging to factor in changes in the *quality* of goods, and so-on.
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