Consumer price index is one of the main inflation indicators the value of which reflects the average prices of services and goods in the composition of the consumer basket for a certain time period. When calculating it, the ratio of the market value of a pre-selected set of products in the current year to the base is used. In Russia, his analysis is headed by the state service of Rosstat. The consumer price index according to this methodology includes the price as the base period consumer basket last month. In January, data for December of the previous year are used. However, the basis of this indicator may vary from country to country.
Consumer Price Index Calculation
In general, the CPI is the quotient of dividing the sum of the products of the current prices for the base year issue by the previous total basket value embedded in the methodology. The calculated consumer price index will be an indicator of changes in living standards in the country. If Q0 Is the volume of products included in the consumer basket, and P0 and Pt - base and current prices, respectively, then the formula should look like this:
- CPI = ∑ (Q0 x Pt): ∑ (Q0 x P0) x 100%.
The result is recorded as a percentage. If it is more than 100, then inflation is observed in the economy, as evidenced by the increasing cost of goods.
High inflation
The consumer price index shows a change in the national currency. The increase in its growth rate indicates an increase in inflation in the economy and the need to tighten monetary policy by the regulatory body. At the same time, the Central Bank, when choosing its strategy of behavior in the market, should focus not only on the actual indicator, but also its expected level. If workers believe in higher prices, they will begin to demand higher wages. This will lead manufacturers to increase the cost of production. On the other hand, high inflationary expectations lead to an increase in investment flows, as current consumption becomes more profitable than saving available funds.
The problem of low inflation
The monetary policy of the Central Bank is often aimed at reducing inflation, as it indicates an overheating of the economy, which prevents its sustainable growth. However, low consumer prices are also dangerous. Low inflationary expectations deprive households of the incentive to invest available funds, gradually stopping economic growth. To prevent this situation, central banks reduce interest rates.
Core index
Many products in the consumer basket are subject to spasmodic changes in prices, which makes the inflation value obtained as a result of a simple calculation unstable. Therefore, in many countries, the core index is further analyzed. It includes about a quarter of goods and services from the basket, excluding everything that is subject to sharp changes in prices as a result of seasonal or weather factors. On the one hand, this makes it a more stable indicator. On the other hand, it leads to the fact that it less fully reflects the depth of the processes occurring in the economy.
Rosstat: Consumer Price Index
The Federal State Statistics Service calculates all major economic indicators. The consumer price index is analyzed in accordance with Decree of the State Statistics Committee No. 23 of March 25, 2002.In March 2015, it amounted to 101.2% versus February and 107.4% versus December 2014 and 116.9% versus the corresponding month of 2014. Prices for goods increased by a larger percentage than for the provision of services. At the same time, the budget includes a value of 111.4%, which makes the cost of the pension coefficient from February 1, 2015 equal to 71.41 rubles.
Criticism of the indicator
The consumer price growth index is based on a predefined set of products. It is to the contents of the basket used that often arises the most questions. In order to reproduce the state of affairs in the national economy, it must reflect the real structure of consumption. But often countries do not change its composition for years, which leads to the exclusion of a number of services that are part of everyday life. In particular, in many developing countries the basket does not include mobile communications, but only wired. On the other hand, if you change the set of goods and services, it will make the new consumer price index incomparable with the previous one. If we compare the obtained indicators, then they can differ by a sufficiently large amount.
Therefore, for the purposes of economic analysis and planning, it is important to carefully approach the structure of the basket, changing it in case of significant shifts in the structure of consumption. In general, PPI quite effectively reflects market conditions.
