Lesson preview · Price Indexes
How CPI Is Calculated
~6 min · Free to read
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a representative basket of goods and services. Think of it like a shopping list that stays the same from year to year — if the bill goes up, prices have risen.
The CPI uses a fixed-basket approach known as a Laspeyres index. A government agency (like the BLS in the US) picks a base year, records the quantities consumers bought that year, and then tracks how much those same quantities cost in later years. The quantities stay locked — only prices change.
Key Term
Laspeyres Price Index
A price index that uses fixed base-year quantities as weights. The basket is frozen in time — it always reflects what people bought in the base year, even if their spending patterns have shifted since then.
Laspeyres CPI formula — cost of the base-year basket at current prices divided by cost at base-year prices
The numerator is the cost of buying the base-year basket at today’s prices. The denominator is the cost of that same basket at base-year prices. Multiply by 100 and you get an index number. If the CPI is 115, prices have risen 15% since the base year.
Check yourself · no marks
If the CPI rises from 100 to 108 over a year, what is the inflation rate for that year?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
An economy’s representative basket contains 10 loaves of bread and 4 kg of cheese. In the base year, bread costs 2 dollars/loaf and cheese costs 5 dollars/kg. In the current year, bread costs 2.50 dollars/loaf and cheese costs 6 dollars/kg. Calculate the CPI.
Practice · 1 / 4
The CPI was 200 in 2023 and 210 in 2024 (base year = 1990). What was the inflation rate between 2023 and 2024?
Next
Like what you read?
Sign up free to save your progress, get spaced reviews tuned to you, and unlock all 50 microeconomics knowledge points with interactive graphs and adaptive practice.