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How to Calculate the Consumer Price Index (CPI) and Inflation Rate - YouTube
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hello, in this video, we're gonna look at
how to calculate the consumer price
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index and the inflation rate. so we'll
start here with the definition of the
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consumer price index, which is
technically the CPI-U. it's a measure
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of the overall cost of goods purchased
by people living in metropolitan urban
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areas. the CPI is used to calculate
inflation, which is just an increase in
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the average level of prices in the
economy. let me present the formula for
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the annual inflation rate. we'll be doing
this at the end of this presentation.
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the annual the annual inflation rate is
the percentage change in the CPI from
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its preceding year. using this formula
right here... it would be the CPI, say, in
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2017
minus the CPI in 2016 all
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divided by the CPI in 2016 and all
multiplied by a hundred... would give us
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the inflation rate for 2017.. all right
let's begin here we have a
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simple economy. this economy has three
goods that consumers buy: soccer balls
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shoes and concert tickets. we have data
for three years. in the base year, 2016,
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we have the price of each item and the
quantity that consumers purchased in
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2017. we have the prices and in 2018 we
have the prices for those three items. we
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do not need quantity data for any other
year but the base year, so I do not need
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quantity data for 2017 or quantity data
for 2018. so an important point to keep
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in mind we only need quantity data from
the base year so the first step in
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calculating the consumer price index is
to calculate the total cost of
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purchasing the base year fix basket
which I highlighted in red we're going
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to call that the fixed basket we're
gonna assume that consumers keep buying
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that same quantity year in and year out
so for 2016
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what is the cost of that basket that
fixed basket so in 2016 it's just a
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price times the quantity and we're gonna
just sum those up and we get five
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thousand dollars ten times 150 times
forty and a hundred times twenty what is
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the cost of this fixed basket in 2017
using 2017 prices it's 15 times 152
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times 40 and $104 times 20 so the
quantities never change
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okay the prices will change but the
quantities from the base year the fixed
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basket will not change and finally in
2018 we're gonna evaluate that fixed
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basket at 2018 prices eighteen times one
hundred fifty six times forty one
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hundred and ten times twenty here's the
calculation down here adding that up the
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cost of that fixed basket in 2018 is a
little over six thousand dollars so just
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rewriting our findings from the last
screen noting that the base year is 2016
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we're gonna construct the CPI index
here's the formula the all-important
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formula so in general the CPI in year ax
is going to be the cost of that fixed
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basket near X divided by the base year
cost of the fixed basket so here's our
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calculation in 2016 in 2016 the cost of
the fixed basket is five thousand what
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is the base year cost well the base year
cost since the base year is 2016 it is
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also five thousand so the CPI in the
base year is going to be a hundred and
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it'll always be a hundred in the base
year the CPI in 2017 is going to be the
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cost of the fixed basket in 2017 which
is five thousand six hundred and six
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dollars up here the base year cost
doesn't change it's $5,000 so the CPI in
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2017 equals one hundred and thirteen
point two the CPI in 2018 the cost of
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the fix basket in 2018 6240 that goes in
the numerator dividing once again by the
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base year cost of the fixed basket which
is five thousand we get a CPI of a
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hundred and twenty four point eight
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rewriting those CP is for each year and
now it's time to calculate the inflation
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rate the annual inflation rate in 2017
and the annual inflation rate in 2018
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here again I'll rewrite the inflation
rate formula so we're gonna use that to
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guide us in calculating the inflation
rate so in 2017 the inflation rate is
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the CPI in 2017 minus the CPI in the
preceding year in 2016 all divided by
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the CPI in 2016 this gives us a
inflation rate of thirteen point two
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percent on average prices rose thirteen
point two percent in 2017 and in 2018
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we're gonna take the CPI in 2018 minus
the CPI from 2017 divided by the CPI in
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2017 we get an annual inflation rate
here of ten point two five percent in
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2018 alright that's it. I hope you found
this video helpful.
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