Measuring the Cost of Living

The
Consumer
Price
Index
(CPI)
●
Measure
the
overall
level
of
prices
Relative
price:
ratio
/
price
Pc
/
Pt
=
opportunity
cost
●
Measures
the
typical
consumer ’s
cost
of
living
●
It
serves
as
the
basis
of
cost
of
living
adjustments
(COLAs)
in
many
contracts:
○
Social
security
payments
○
Wage
contracts
How
the
CPI
is
calculated
1.
Fix
the
“basket”
The
Bureau
of
Labor
Statistics
(BLS)
surveys
consumers
to
determine
what;s
in
the
typical
consumer ’s
“shopping
basket”
-
To
determine
which
prices
are
most
important
to
the
typical
consumer
-
Assign
different
weights
2.
Find
the
prices
The
BLS
collects
data
on
the
prices
of
all
the
goods
in
the
basket
at
each
point
in
time
Prices
are
collected
from
75
locations
each
month
from
6,000
households
and
22,000
establishments
(department
stores,
supermarkets,
hospitals,
filling
stations,
and
other
types
of
stores
and
service
establishments)
3.
Compute
the
basket’s
cost
Use
the
prices
to
compute
the
total
cost
of
the
basket
4.
Choose
a
base
year
and
compute
the
index