Consumer price index

The consumer price index is a composite measure of how much more or less it costs to buy one and the same set of goods and services compared with an earlier period. The set is fixed in advance: food, clothing, fuel, medicines, transport, housing, communications, the services of a hairdresser and of repair workers. Statisticians regularly collect prices for these items in shops and from suppliers across different regions, combine them into a single level and compare it with the level of the base period, which is taken as the reference value. The increase in the index over a period is what is called consumer inflation.

How the calculation works

First, the change in the price of each item is calculated; then these changes are added up using weights — the shares that the corresponding group takes up in household spending. The larger the spending group, the more strongly a rise in its prices pulls the index. That is why a move in the index is explained not by the average rise in price tags but by rising prices for the large items specifically: food, fuel, utilities. The basket and the weights are revised from time to time so that they do not fall behind what people actually buy.

The CPI is published with a lag and always describes the past. It is relied on when payments are indexed, when the real return on investments is calculated and when assessing what level of the risk-free rate covers the loss of money's purchasing power. Calculated separately is core inflation — the same basket without the most volatile items, in order to separate persistent price growth from seasonal and one-off spikes. The CPI does not contain market expectations of future price growth: those are read through breakeven inflation.

Where it shows up in issuers' data

A retail chain's revenue grows both with the number of purchases and with the rising prices of its product range, so it cannot be compared with the previous year without keeping the CPI in mind:

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Where the indicator is misread

The main mix-up is confusing the level of the index with its increase. The index by itself shows no "inflation" at all; only the comparison matters: month on month, year on year or year to date. These three figures diverge at one and the same point in time, and a reference to "CPI inflation" that does not state the basis of comparison defines nothing.

The second is trying to use the index to explain the cost of a particular purchase. The CPI is averaged across the country and across the product range: it describes neither the price in an individual shop nor the rise in the price of an individual product. Nor is it suitable as a measure of prices for things that households do not buy directly: industrial raw materials, equipment and housing as an asset belong to other indices.