UNDERSTANDING THE CPI
THE CONSUMER Price Index, commonly referred to as the CPI, measures changes in the general level of prices of consumer goods and services purchased by private households. It is the best economic instrument to use when determining the effect of changes in retail prices on household budgets and expenditure. It is one of the most used of the statistical series produced by the Statistical Institute of Jamaica (STATIN).
The CPI measures changes in the prices of specified items that people purchase. It measures price movements of a given quantity of consumer goods and services. The goods and services included within the scope of the index can be figuratively thought of as a ‘basket’.
The basket represents a mix of consumer goods and services purchased by the typical household. No two households are exactly alike in their spending habits. Each household purchases a different combination of goods and services for consumption. Generally speaking, the CPI basket includes those goods and services which are important in terms of the size of expenditure made on them by households.
The items in the CPI basket are based on information obtained from household expenditure surveys (HES) undertaken by STATIN. Since the CPI assumes the purchase of a fixed ‘basket’ of goods and services, it must be updated periodically to ensure its continued relevance to the actual spending habits of the households to which it relates. Relative Importance of Items in the CPI basket
The expenditure on all items in the basket is summed to obtain a total household spending. The amount spent on each item in the CPI basket is compared to total household spending to obtain the relative importance or ‘weight’ of the items in the ‘basket’. The 12 major divisions of the CPI each have representative ‘division weights’. The weights, which indicate the relative importance of the items in the basket, establish the impact that a particular price change will have on the overall index. For example, a five per cent rise in the price of electricity would have a much greater impact on the household budget than a five per cent increase in the price of newspaper. This is due to the fact that, in any given period, households spend more on electricity than they do on newspapers.
In organising the CPI ‘basket’, the selected items of goods and services are grouped together according to various categories. All goods and services in the CPI basket are divided into 12 major expenditure division that are based on a consumption classification system developed by the United Nations. The classification system is the Classification of Individual Consumption According to Purpose (COICOP), and the 12 broad expenditure divisions are:
Food and Non-alcoholic Beverages
Alcoholic Beverages and Tobacco Clothing and Footwear Housing, Water, Electricity, Gas and Other Fuels
Furnishings, Household Equipment and
Routine Household Maintenance Health Transport Communication Recreation and Culture Education Restaurants and Accommodation Services
Miscellaneous Goods and Services
IIIIIThe COICOP classification system breaks the 12 divisions into smaller groups of related items, termed Groups. These Groups are further broken down into ‘classes’, which are the combination of similar items. Price collection
Price are collected from several retail outlets from which households do their shopping and also from various business organisations which provide services to households. Monthly, quarterly and annual pricing surveys are carried out at outlets such as grocery stores, clothing and footwear stores, doctors, schools, among others.
Why is it that the CPI does not seem to move as much as one’s spending?
First, actual increases in the living expenses of families reflect two movements
Increases in the cost of goods and services purchased. Changes in lifestyle. The CPI assumes a fixed standard of living as represented by the fixed basket. It therefore does not measure changes in living standards. For example, if your mode of transportation used to be by bus up to last year and it has changed because you now have acquired a motor vehicle, your transportation expenses in the current year are expected to increase as the cost of maintaining a vehicle is more than the cost of the bus fares that were paid in the previous year.
This increase in your living expenses, therefore, was not brought about by the increase in the cost of transportation but was due to the fact that your living standard has changed.
Second, the index is based on the average price of a number of items combined. Therefore, a rise in the price of one item may be compensated by a fall in another.
Consequently, the effect of the price increase on the index may not be marked. For example, a housewife confronted with a sudden rise in the price of bread is concerned to find that there is only a small change in the index for ‘Food’. This could be due to the fact that bread is only a small part of the total number of items used in the index or it may be that decreases in the price of other items compensated for the increase in the price of bread.
IIUSES OF THE CPI
1. Determining price changes between specified periods: * Measuring a month-tomonth price change. * Measuring a price change for a particular period. 2. Using the CPI as an economic tool: * A deflation tool. * An escalation tool. 3. Determining the purchasing power of money: * The buying power of the Jamaican dollar changes over time as the prices of goods and services change. The CPI is used widely to determine the amount of money that would be needed in the present to have the same purchasing power as an amount that was specified in the past.
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