INFLATION is a subject of common concern and the year-on-year rate of change of the Consumer Price Index (CPI) is an important indicator of inflation affecting consumers. In May 1993, the CPI increased by 8.5% over that in May 1992, and the inflation ratewas hence taken as 8.5%.
The CPI as a statistical measure is in fact not very simple, and if we are not careful, we may easily make mistakes in its interpretation or application.
Here are some examples illustrating a few of the more tricky issues.
Situation (a): If the CPI has increased from 130 in March last year to 140 in March this year, is it correct to say the inflation rate is 140 minus 130, i.e. 10%? No, it is not correct to say the index has increased by 10%. We should say there has been an increase of 10 index points. Otherwise, we can say there has been an increase of 7.7%. This letter figure is worked out as below: (140-130) / 130 x 100% = 7.7%.
Situation (b): You and your brother talk about how you spend your money. Your brother says prices have increased by about 12% over the year.
You, on the other hand, think there has been a 15% increase. Still the published CPI shows a 9.5% increase. Which of these figures is more reliable? Well, even if you have done some recording (say, by jotting down in your diary price information on your purchases), it is likely you did not record every item.
Probably only those with large price increases got recorded or remembered. This is natural because such increases often have a greater impact.