what is the consumer price index?
http://en.wikipedia.org/wiki/Consumer_price_index
Now this is a case where you want to use Google and Wiki :)
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a basket of goods and services. It is used to gauge inflation and reflect price changes in the economy.
To calculate the CPI, statisticians gather data on the prices of thousands of goods and services that are typically bought by consumers. These prices are collected from a representative sample of retail stores, service establishments, and providers of rental housing. The basket of goods and services includes a wide range of items, such as food, clothing, transportation, housing, medical care, education, and recreation.
The steps to calculate the CPI are as follows:
1. Selecting the basket of goods: Economists determine the specific items that represent the typical spending patterns of urban consumers. This basket is often based on consumer expenditure surveys.
2. Collecting price data: Surveyors then collect price data for each item in the basket on a regular basis. This data is gathered from various locations across the country to ensure a representative sample.
3. Calculating price index: The price index is calculated by comparing current prices to a base period. The base period is assigned a value of 100 to serve as a reference point. For example, if the index for a particular year is 120, it means prices have increased by 20% since the base period.
4. Weighting and aggregating: Different items have different importance in the overall basket of goods and services. Therefore, each item is assigned a weight that reflects its significance in consumer spending. The weights are usually based on expenditure data from surveys. The price changes for individual items are multiplied by their respective weights and then summed to get the overall CPI.
The CPI provides important information for economists, policymakers, businesses, and individuals to understand inflation and make decisions based on price changes in the economy. It is commonly used to adjust wages, contracts, and government benefits for inflation, as well as to compare changes in purchasing power over time.