Which formula is used to calculate the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is calculated using a formula that reflects the relationship between the cost of a fixed basket of goods and services in the current year compared to the cost of that same basket in a base year. The correct formula facilitates understanding how much prices have changed over time and effectively tracks inflation.

Using the cost of the basket in the current year divided by the cost of the basket in the base year and then multiplying by 100 establishes a clear index value. This methodology ensures that changes in price levels are normalized to a base year, allowing for straightforward comparisons and analysis. The multiplication by 100 converts the ratio into an index number that can be easily interpreted, where a CPI of 100 indicates that prices have not changed from the base year, while a CPI above or below 100 indicates inflation or deflation, respectively.

This formula is critical in economic analysis and policymaking, as it forms the basis for understanding how living costs change over time, impacting consumer purchasing power and economic health.