The Consumer Price Index (CPI) uses a market basket of goods and services purchased by a typical urban consumer to measure the cost of living over time. The CPI divides this market basket into eight categories, with housing making up 42% and transportation 17%. It compares the price of this market basket in the base year to other years to calculate index numbers. For example, using 2012 as the base year, the CPI index was 100 in 2012, 107.14 in 2013 when the market basket cost $7,500, and 114.28 in 2014 when it cost $8,000.

2. The Consumer Price Index, CPI, is a basket of goods and services
purchased by the typical urban consumer.
The CPI measures the “cost of living” by comparing the price of the
market in the base year to all other years.

3. The CPI uses a market basket purchased by the typical
urban consumer. The market basket is divided into eight
categories.
Those categories are:
1. Housing 42% of the basket
2. Transportation 17%
3. Food and Beverages 15%
4. Medical Care 7%
5. Education and Communication 6%
6. Recreation 5%
7. Apparel 4%
8. Misc. 3$

4. The following is an example of some of the items
found in each of the categories of the CPI.
This list is NOT inclusive. It is only used to give a brief
overview of some of the goods found in the basket.

5. Housing
The CPI uses “equivalent rent” to
compute housing prices. Equivalent
rent is simply what homeowners would
pay if they were renting their homes .
House Furniture
Electricity

6. Transportation
Some of the items placed in the CPI
basket for transportation include
spending on used and new cars,
gasoline, and airline transportation

7. Food and Beverage
The food and
beverage category
contains the types of
foods and beverages
the typical urban
consumers purchases
and also includes
eating out

8. Health Care (Medical)
Some of the items placed in the CPI
basket for health care includes
spending on health insurance, glasses,
and prescription drugs

9. Education and Communication
Some of the items placed in the CPI
basket for education and
communication include spending for
tuition, cell phone service, and
computers

10. Recreation
Some of the items placed in the CPI
basket for recreation includes spending
on books, bikes, and admission to
concerts, etc.

11. Apparel
Some of the items placed in the CPI
basket for apparel includes spending on
men's clothing and women's clothing

12. Miscellaneous
Some of the items placed in the CPI
basket for miscellaneous include
haircuts and styling and tailoring
services

14. So all the goods and services are added up and put in the market basket.
Transportation
Housing
Food and Beverages
Education and Communication
Medical Care
Recreation
Apparel
Miscellaneous

15. What we do with the basket is compare it to the cost of the
basket in other years.
2012: $7,000 2013: $7, 500 2014: $8,000

16. Remember that the CPI is an INDEX NUMBER so we need to convert
the market basket price to an index number.
To do this we must choose a base year to compare the cost of the
other baskets to.
2012: $7,000
Let’s use 2012 as the
base year

17. The formula for the CPI is simply:
Base Year
Current Year
100

18. Base
Year
Current
Year
100
Calculating the Index Number when the base year is also the current
year
$7,000
$7,000
($7,000/$7,000) x 100 = 100
The index number when the
base year is the current year
is ALWAYS 100

19. Base
Year
Current
Year
100
Calculating the Index Number when the current year is 2013
(current year cost of market basket is $7,500)
$7,000
$7,500
($7,500/$7,000) x 100 = 107.14

20. Base
Year
Current
Year
100
Calculating the Index Number when the current year is 2014
(current year cost of market basket is $8,0000)
$7,000
$8,000
($8,000/$7,000) x 100 = 114.28