How to compile an INDEX like the CPI

This explanation is in conjunction to page 379 in your textbook. It explains on a small, small scale
how StatsSA go about to compile the CPI.

Imagine a basket filled with goods and services that a

household consume on a monthly basis. For our example
we will work with only three (to keep it simple, but you can
use a million different goods and services if you wish). Our
example uses transport () food () and housing ().
Our household uses 3 (); 2 () and 5 () per month.
Each of these items has a price tag on and every year the
price increases. Take a look at the table below with the
prices for these items for 2 separate years.

Product Quantity P 2010 P 2017

• •3 • 10 • 12
• •2 • 20 • 22
• •5 • 12 • 14

Step 1: Calculate the amount spent per product in 2010 (base year).
Thus: Quanity x P2010
•  3 x 10 = 30
•  2 x 20 = 40
•  5 x 12 = 60
Total spent in 2010 was = 130

Step 2: Calculate a weight for each item.

Tells us what proportion (%) of total amount was spent on each item.
 30 ÷ 130 = 0.23 These are the weights of each item in your
 40 ÷ 130 = 0.31 basket. (the proportion we spent on each
 60 ÷ 130 = 0.46 item compared to the total)
The sum of these weights MUST = 1 (0.23 + 0.31 + 0.46 = 1)
 How to compile an INDEX like the CPI

Step 3: Calculate a Specific Price Index for each item.

Specific Price Index = (Price in specific year ÷ Price in base year) x 100

When: (base year ÷

Specific year 2010 (base year Specific year 2017 (base year base year) you will
2010) 2010) ALWYS get 100!!!!

•  (10 ÷ 10)x100 = 100 •  (12 ÷ 10)x100 = 120

•  (20 ÷ 20)x100 = 100 •  (22 ÷ 20)x100 = 110
•  (12 ÷ 12)x100 = 100 •  (14 ÷ 12)x100 = 116

Step 4: Calculate composite price index.

Composite Price Index = Sum of (Specific Index x Weight)
Composite Price Index = SUM of (Answers Step 2 x Step 3)

.
If you do the same calculation
• 120 x 0.23 = 27.6 but use the base year values
(100) your composite index
• 110 x 0.31 = 34.1
value will be 100. It will always!
• 116 x 0.46 = 53.36

• SUM = 115 Composite index value

The CPI is a Composite Price Index like the one above!!! StatsSA follow the above steps for 12 groups
of consumer products (we used only 3) to compile the CPI. From the CPI values we calculate the
national inflation rate. To calculate the “inflation rate” for the items in our example:

CPI in specific year − CPI in base year

Inflation rate = 𝑥𝑥 100
CPI in base year

(115 − 100)
Inflation rate = 𝑥𝑥 100
100

Inflation rate = 15 %