ASSIGNMENT

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Name: Zarmeen Imran Ahmed

Seat No: B21120106048

Course: Stats 402

Course Incharge: Miss Maryam Alamgir

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CPI (CONSUMER PRICE INDEX):

DEFINITION:

“CPI, or Consumer Price Index, is a measure that tracks how the

prices of goods and services change over time, reflecting the cost of
living for an average person.”

The Consumer Price Index (CPI) is a tool used to measure retail inflation in
an economy by tracking changes in prices of commonly used goods and
services. It calculates price variations in fixed items, using a common basket
of goods and services, such as food, clothing, transportation, housing,
electronics, apparels, education, and medicine. The CPI can also be used to
calculate the cost of living and changes in a nation's purchasing power. It
detects price changes of items falling under the common basket and
averages them. CPI is a reliable measure for determining inflation and
deflation, as it helps determine the rise in prices and fall in prices.
FORMULA:
Ct
CPI = × 100
Co

CPI : consumer price index in current period.

Ct : cost of market basket in current period.
C0 : cost of market basket in base period.

USES:

• Measuring Inflation:
CPI is used to gauge the rate of inflation, which is the increase in
the general price level of goods and services over time. It helps in
understanding how much more you need to spend to maintain the same
standard of living.

• Adjusting Wages:
Many labor contracts and government programs are tied to CPI.
Workers’ wages may be adjusted based on CPI to keep up with the rising
cost of living.

• Social Security Benefits:

Social Security payments in some countries are indexed to CPI to
ensure that retirees receive payments that maintain their purchasing
power.

• Economic Analysis:
Economists and policymakers use CPI data to monitor economic
trends, make informed decisions, and implement monetary and fiscal
policies.

2
INFLATION:
Inflation is the steady increase in the general price level of goods and
services in an economy, resulting in the reduced purchasing power of a
currency. It is often measured using indicators like the Consumer Price Index
(CPI) and can be caused by factors like increased demand, rising production
costs, or changes in monetary policy. Moderate inflation is considered
normal and even beneficial for economic growth, but high or hyperinflation
can be detrimental to an economy. Central banks typically aim to manage
inflation within a target range through monetary policy.

DEFLATION:
Deflation is the persistent decrease in the general price level of goods
and services in an economy, leading to an increase in the purchasing power
of a currency. It can occur due to reduced consumer spending, falling
demand, or other economic factors. While deflation may sound beneficial,
excessive deflation can be problematic, as it can discourage spending and
investment, leading to economic stagnation. Central banks often seek to
prevent deflation through policies like lowering interest rates and increasing
the money supply.

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