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note_ch24 - Chapter 24 The Cost of Living and the CPI This...

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Chapter 24 – The Cost of Living and the CPI This chapter describes an alternative, and commonly used approach, to calculating inflation, known as the consumer price index, or CPI. The CPI is an index of the average price of a market basket of consumer goods that is supposed to represent average consumer expenditure patterns. There are 5 steps in the process. First, the Bureau of Labor Statistics, a government agency, determines the average consumer market basket – for example, in a month the average household buys 3 boxes of cheerios, 4 cans of Campbells chicken noodle soup, etc. Second, each month, the BLS goes to stores and records the prices of those goods. Third, they calculate the cost of the market basket by multiplying the items in the basket by the market prices. Fourth, a base year is selected so that the index can be calculated. The index is equal to the cost of the

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market basket relative to its cost in the base year, all multiplied by 100.
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