A consumer price index (CPI) is an estimate as to the price level of consumer goods and services in an economy which is used as a way to estimate changes in prices and inflation. A CPI takes a certain basket of common goods and services, for instance a gallon of gas, a loaf of bread and a haircut, and tracks the changes in the prices that basket of goods over time.
Select a base year for the consumer price index. The PCI of the base year is always set to 100.
Select a basket of goods and add the prices of all the goods in your base year. For instance, if you choose 2000 as your base year and choose a gallon of gas, a loaf of bread and a haircut as your basket of goods, add the prices of these three goods in the year 2000.
Select the year for which you want to calculate the CPI and add the prices of all the goods in your basket of goods for that year. For instance, if you want to calculate CPI in 2005 using the basket of goods in the example, add the prices of a gallon of gas, a loaf of bread and a haircut in 2005.
Divide the price of the basket of goods in the year for which you are calculating CPI by the price of the basket of goods in the base year and multiply the result by 100 to calculate the CPI in that year. For instance, if your basket of goods cost £32 in 2000 and £35 in 2005, you would divide 55 by 50 and multiply the result by 100 to calculate that the CPI in 2005 is 110. This means prices increased 10 per cent from 2000 to 2005.
A CPI can go up or down over time. When prices in an economy are falling, the economy is experiencing "deflation" as opposed to inflation. The US federal government's uses a very large basket of goods go calculate CPI that include things like food, apparel, medical care, education and transportation prices.