A) What is the CPI and what does it measure? B) What is the rate of inflation in

Question

A) What is the CPI and what does it measure?

B) What is the rate of inflation in 2018 as measured by the CPI?

Given the following relative weights of importance for the major components of the Consumer Price Index or CPI: RIW 2017 2018 Food: Food at home Food away from home Alcoholic beverages 10.1 6.1 1.6 148.4 138.7 148.5 153.3 148.6 151.8 Housing: Residential rent Homeowners rent Furnishings, utilities, etc 5.5 18.1 19.0 165.7 151.2 123.7 155.7 126.5 Apparel and upkeep 6.5 132.0 138.7 Transportation: New vehicles Used vehicles Motor fuel Public transportation Other 5.5 1.4 4.8 1.4 5.7 139.1 128.7 143.0 131.9 115.3 123.1 122.8 121.0 121.3 Medical care Entertainment Other goods and services 4.8 5.1 220.5 153.9 206.9 235.2 159.1 215.4

Explanation / Answer

A) CPI stands for consumer price index.

CPI for a given year = (Cost of market basket in a given year/ Cost of market basket in base year )*100

Changes in CPI are used to measure inflation.

B)

The rate of inflation as measured by the CPI in 2018 is 3.51%

Rate of inflation in 2018 using CPI Multiply the relative weights with CPI's for each item for each year and then calcuate the percentage change of CPI from 2017 to 2018. 2017 2018 RIW CPI 2017 (RIW*CPI 2017)/100 2018 RIW*CPI 2018 Food Food at home 10.1 148.4 14.9884 153.3 15.4833 Food away from home 6.1 138.7 8.4607 148.6 9.0646 Alcoholic beverages 1.6 148.5 2.376 151.8 2.4288 Housing Residential rent 5.5 165.7 9.1135 171 9.405 Homeowners rent 18.1 151.2 27.3672 155.7 28.1817 Furnishings , utilities, etc 19 123.7 23.503 126.5 24.035 Apparel and upkeep 6.5 132 8.58 138.7 9.0155 Transportation New Vehicles 5.5 139.1 7.6505 143 7.865 Used vehicles 1.4 128.7 1.8018 131.9 1.8466 Motor fuel 4.8 111.6 5.3568 115.3 5.5344 Public transportation 1.4 121 1.694 123.1 1.7234 Other 5.7 121.3 6.9141 122.8 6.9996 Medical care 4.4 220.5 9.702 235.2 10.3488 Entertainment 4.8 153.9 7.3872 159.1 7.6368 Other goods and services 5.1 206.9 10.5519 215.4 10.9854 CPI 145.45 150.55 Inflation for 2018 [(CPI in 2018 - CPI in 2017)/(CPI in 2017)]*100 Inflation for 2018 [(150.55 - 145.45)/(145.45)]*100 Inflation for 2018 3.51%

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