Chapter 24

Measuring the Cost of Living

College of BusinessAlfaisal

UNIVERSITY

ConsumerPriceIndex

CPI

CPI Consumer Price Index

The market value of a typical basket of goods.

Measure CPI - Five Steps

1. Select items for Basket

2. Find Prices

3. Total Cost

4. Pick Base Year and compute Index

5. Compute Inflation Rate

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What’s in the CPI’s Basket?

!  Food and beverages

!  Tobacco

!  Clothing and footwear

!  Housing

!  Water & fuels

!  Furnishings and house repairs

!  Health

!  Transportation

!  Communication

!  Leisure

!  Education

!  Restaurant & hotels

!  Miscellaneous

The basket will vary from country to country. The following is an example of the basket in Lebanon

select items

find prices

total the cost

pick base year and compute

index

CPITotal Cost this Year

Total Cost in base yearx 100

CPI Inflation Rate

CPI Year 2 - CPI Year 1

CPI Year 1= x 100

Year Total CPI Inflation

2010 522 100.0

2011 544 104.2 4.2%

2012 532 101.9 -2.2%

2103 560 107.3 5.3%

2014 577 110.5 3.0%

2015 600 114.9 4.0%

Converting to Today

Price level today

Price level in prior year

Amount in prior

yearX

I earned 100,000 in 2010 and the CPI was 175.

In 2014 I earned 150,000 and CPI was 250.

What year was I better off?

Year CPI Income

2010 175 100,000

2014 250 150,000

%Chg 42.9% 50.0%

Year General Index

Food and non -

alcoholic beverages

TobaccoClothing

and Footwear

Housing , Water,

Electricity, Gas, and

other fuels

Furnishings,

household equipment & Routine

Health Transport Communication

Recreation and

CultureEducation

Restaurants and Hotels

Miscellaneous goods

and services

1988 86.9 71.3 67.0 140.6 72.4 107.9 92.2 111.0 74.0 117.0 85.0 87.3 89.8

1989 87.9 72.5 67.2 136.6 70.8 106.6 94.8 112.5 129.5 115.9 87.0 87.0 88.5

1990 87.0 74.5 67.8 136.7 71.0 106.9 95.4 98.1 151.4 114.4 86.0 87.9 85.1

1991 90.3 79.7 74.2 135.4 74.3 108.4 95.3 101.9 151.4 117.6 86.5 91.0 86.3

1992 89.5 82.0 78.6 134.8 75.3 109.5 97.1 96.4 104.1 120.3 87.6 91.6 85.7

1993 90.6 83.0 79.0 133.7 79.5 109.9 97.1 95.9 88.4 118.5 88.8 92.7 86.8

1994 91.8 81.8 78.9 131.9 84.6 108.8 96.5 97.2 88.4 117.1 89.8 92.4 87.8

1995 96.6 81.6 79.0 130.4 90.5 108.6 96.8 111.7 143.0 115.0 92.2 93.4 88.3

1996 96.8 83.9 79.0 126.5 90.5 108.1 96.0 110.7 143.0 114.7 93.6 93.6 87.8

1997 96.5 84.9 85.7 124.8 90.5 106.3 96.5 108.5 143.0 113.6 94.8 93.1 84.8

1998 96.2 84.8 95.9 123.2 90.0 107.0 97.4 107.6 142.1 113.1 95.7 93.5 82.1

1999 94.2 82.6 96.2 117.2 89.8 106.3 97.7 102.3 136.6 110.4 96.2 94.0 81.2

2000 93.2 81.2 94.4 111.5 89.8 103.8 98.9 102.5 136.9 106.6 98.1 93.7 81.1

2001 92.0 80.5 90.9 109.0 89.8 102.2 98.4 98.4 132.7 106.1 98.6 92.8 80.2

2002 92.1 80.6 97.0 108.2 89.8 101.0 98.5 99.6 128.3 105.3 99.2 93.8 81.3

2003 92.6 82.9 98.0 107.7 89.8 100.0 98.7 99.4 122.9 103.2 99.5 94.3 83.1

2004 92.9 85.4 98.4 105.6 90.0 97.6 98.9 99.2 120.2 99.8 100.8 93.9 84.1

2005 93.4 88.2 97.5 103.8 89.7 98.7 98.7 100.1 104.2 98.8 102.1 94.2 85.8

2006 95.2 93.8 97.7 103.6 90.7 98.4 100.0 97.0 100.6 97.9 103.1 96.5 91.9

2007 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

2008 106.1 113.7 105.1 101.0 108.5 103.2 103.2 97.0 98.1 97.7 110.3 103.2 101.6

2009 110.5 116.4 107.3 101.6 120.1 105.6 103.2 98.2 98.2 99.2 111.8 110.0 104.9

2010 114.7 120.8 119.2 101.1 129.2 107.0 103.3 99.7 97.7 97.2 113.2 113.8 110.1

2011 119.0 127.1 126.7 99.7 143.9 115.5 103.4 103.1 92.0 104.7 108.7 117.0 113.9

2012 122.4 132.9 141.3 103.3 148.7 117.5 105.6 108.3 92.1 104.5 110.2 121.7 117.8

2013 126.7 140.5 153.1 104.8 153.8 122.6 109.0 111.0 93.8 106.3 112.6 126.8 117.6

Problems with CPI

1. Substitution

2. New goods

3. Changes in Quality

Substitution

Price

Quantity

New Goods

1983

New Goods

Added in 1998

Quality

2007 - $600 2015 - $600

1. Starbucks raises the price of Frappuccinos.

2. A local manufacturer raises the price of the industrial tractors it produces.

3. Armani raises the price of the Italian jeans it sells (in your own country).

1. Starbucks raises the price of Frappuccinos. The CPI and GDP deflator both rise. 2. A local manufacturer raises the price of the

industrial tractors it produces. The GDP deflator rises, the CPI does not.

3. Armani raises the price of the Italian jeans it sells (in your own country).

The CPI rises, the GDP deflator does not.