Consumer price index (CPI) and inflation are economic terms that are often used interchangeably, but they refer to two different things. CPI measures the average prices of goods and services purchased by consumers. Inflation, on the other hand, is an increase in the general level of prices in an economy. So what’s the difference between CPI and inflation? This blog post will explain!
What is Inflation?
Inflation is a “general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money” [Source]. It can be defined as the “rate of increase in price over a given period of time” [Source].
Investopedia defines inflation as the “decline of purchasing power of a given currency over time” [Source]. Inflation is usually considered bad because it means that the value of a currency has gone down. This makes it harder for people to buy the things they need. Inflation is caused by various factors, including pressures on the economy’s supply or demand side and consumer expectations.
The chief culprit of inflation is wrong economic decisions, especially in a country that lacks economic freedom or an environment dominated by an oppressive government’s monopoly of the industry. From a political point of view, inflation can result from sabotage by opposition parties or interested foreign parties who wish to overthrow a government.
What is CPI?
The consumer price index, commonly referred to as cpi, is a price index defined as the “price of a weighted average market basket of consumer goods and services by households. Changes in measured CPI track changes in prices over time” [Source]. CPI is also a “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services” [Source].
CPI measures change over time in the prices consumers pay for a certain representative basket of goods and services. It can be calculated by collecting a particular number of sample prices monthly and then “weighing the index for each product or service in proportion to its share of recent consumer spending to calculate the overall change in prices” [Source]. The CPI can be used to measure inflation or deflation in a locality. It employs a survey approach to arrive at required conclusions with price sample and index weights rather than the producer price index. The CPI can be done monthly or quarterly, depending on what relevant parties wish to find out.
Difference between CPI and Inflation
Inflation is an increase in the price of goods and services, while the cpi is a measure of the inflation experienced by people in their day-to-day shopping activities [Source]. CPI can be used to measure inflation, but inflation cannot measure itself or cpi. This also means that cpi is a way to measure index prices while inflation is only concentrated with the given prices. Inflation is explained by considering the buying power of a currency, but cpi usually involves looking at the index prices of particular goods and services in the samples taken out. Also, inflation tends to consider the buying ability of consumers by factoring in their income and the poverty datum line. On the other hand, cpi concerns itself with assessing an economic situation to see if there is inflation or deflation so that it can be classified as an economic investigative tool. Inflation tends to have a much wider reach, whereas cpi is mostly based on the consumer product indices. Inflation is a result of a cpi procedure.
CPI measures the average prices of a basket of consumer goods and services [Source], and inflation measures the rate of rising prices of goods and services in an economy.