CPI & the Consumer Basket
Compare two observations of one series, distinguishing month-on-month, year-on-year and custom-period price changes.
Question, try, then observe
What did you just see?
A 10% food-price increase does not mean every household's living costs rise 10%. If food accounts for 30% of the base budget and everything else is unchanged, this simplified basket rises 3%. Weights represent spending importance, not item counts.
Slower inflation still means rising prices
From 100 to 103 to 105, the second increase is smaller: disinflation. Prices have not returned to 100. Deflation requires a falling index, such as 105 back to 103. Compare equal period lengths and consistent seasonal-adjustment conventions; a one-month change is not an annual inflation rate.
CPI, core CPI and the GDP deflator
follows household purchases and can include imported consumer goods. The GDP deflator follows domestically produced final output, with different coverage and weights. A common core CPI excludes food and energy to examine price movements beyond some volatile components, but check each publisher's definition. It does not imply food and energy are unimportant or represent every person's living costs.
What the fixed basket can and cannot show
The interaction normalizes base spending to 100 and averages price relatives with base weights. Changing weights creates a different hypothetical household, not a revision to official history. Official methods include sampling, quality adjustment, substitution and aggregation procedures; these three categories cannot reconstruct Taiwan's or the US official CPI.
Another example
- Set two observations of one series to 100 and 103.
- Check dates: MoM requires one month and YoY twelve months.
- The increase is 3 index points and 3%, not 103% inflation.
Show formal definition and formula
CPI measures changes in prices paid by consumers for goods and services. Its two-period inflation rate is the current index divided by the previous index minus one; our teaching basket weights price relatives using fixed base-period expenditure shares.
Two-period price change
Basket with fixed base expenditure weights
CPI measures changes in prices paid by consumers for goods and services. Its two-period inflation rate is the current index divided by the previous index minus one; our teaching basket weights price relatives using fixed base-period expenditure shares.
- CPI0
- Previous index in the same series (points)
- CPI1
- Current index in the same series (points)
- π
- Two-period decimal change
- wj
- Item j's base expenditure weight
- pj,0
- Item j's base price
- pj,1
- Item j's current price
- Units
- Indices use points; π is decimal, so 0.03 displays as 3%. MoM is one month, YoY twelve; custom changes are not automatically annualized.
Common mistakes
Do not confuse index points with percentages, mix reference bases or seasonal-adjustment series, or equate disinflation with falling prices. CPI/PPI rates can be compared over matched periods; their index levels should not be subtracted.
Frequently asked questions
Why do my expenses differ from CPI?
Spending weights, location, products and quality can differ; official CPI is an average for a defined population.
You can now explore…
- Separate index levels, changes and comparison periods
- Explore prices and expenditure weights in a consumer basket
Term reference1 terms
Open a term when you need a reminder. Underlined words in the article work too.