Consumer Price Index

Most countries have a simple common-sense approach to measuring inflation, using the so-called “Consumer Price Index” (CPI). For this purpose, the purchasing patterns of consumers are analyzed to determine the goods and services which consumers typically buy and which can therefore be considered as somehow representative of the average consumer in an economy. As such they do not only include those items which consumers buy on a day-to-day basis (e. g. bread and fruit), but also purchases of durable goods (e. g. cars, PCs, washing machines, etc.) and frequent transactions (e. g. rents). Putting together this “shopping list” of items and weighting them according to their importance in consumer budgets leads to the creation of what is referred to as a “market basket”.7 Each month, a host of “price surveyors” checks on the prices of these items in various outlets. Subsequently, the costs of this basket are then compared over time, determining a series for the price index. The annual rate of inflation can then be calculated by expressing the change in the costs of the market basket today as a percentage of the costs of the identical basket the previous year.

However, the developments of the price level as identified by such a basket only reflect the situation of an “average” or representative consumer. If a person’s buying habits differ substantially from the average consumption pattern and thus from the market basket on which the index is based, that person may experience a change in the cost of living that is different to the one shown in the index. There will therefore always be some people who experience a higher “inflation rate” for their “individual basket” and some who face a lower “individual rate of inflation”. In other words, the inflation measured by the index is only an approximate measure of the average situation in the economy; it is not identical to the overall price changes faced by each individual consumer.