4-2 Calculating the index
The CPI compares the cost of the typical market basket of goods and services in a current month with its cost one month ago, one3 year ago, or ten yeas ago. The point in the past with which current prices are compared is called the base period. The index value for the base period is set at $100. the original base period used by the Bureau of Labor Statistics, of the U.S. department of labor, for the CPI index was 1967. for example, let us say that, in 1967, the prescribed market basket could have been purchased for $100. now suppose the same combination of goods and services costs $639 in 2009. we can then compute the CPI for 2009 by multiplying the ratio of the current price to the base period price by 100. in our example, the price index is 639/100*100=639, which means that the 2009 price of the contents of the market basket is 639% of its base period price.
Updating the shopping basket
The revised CPI introduced by the BLS in 1987 includes indexes for two populations: urban wage earners and clerical workers, and all urban consumers. As a result of the revision, both the CPI-W and the CPI-U UTILIZE UPDATED EXPENDITURE weights based upon data tabulated from the years 1982,1983, and 1984 of the consumer expenditure survey and incorporate a number of technical improvements. This method of assessing inflation does not imply, how ever, that consumers actually purchase the same goods and services year after year. Consumers tend to adjust their shopping practices to changes in relative prices, and they tend to substitute other items for those whose prices have increased greatly in relative terms. We must understand that the CPI does not take into account this sort of consumer behavior, because it is predicated on the purchase of a fixed market basket of the same goods and services, in the same proportions, month after month. For this reason , the CPI is called a price index rather tan a cost of living index. Although the general public often refers to it as a cost of living index.
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