The Consumer Price Index monitors changes in a given basket of products. The Bureau of Labor Statistics has determined the composition of this basket which is referred to as “the market basket”.

“The market basket” includes several hundred products that an average family in the USA consumes during a month. Prices of the products in the market basket do not rise by the same rate, and some of them even decline.

Assume that we began monitoring “the basket of products” in January 2007 (the first observation), and its price that month was $250 (this is not the real figure). The index for that month will be 100 points.During the following two months, the prices of the basket were $260 and $265, as shown in column 2 in the following table, and the Consumer Price Index will appear as indicated on the next slide. In practice, the Bureau of Labor Statistics publishes only the figures in columns (1), (3), and (4).

Table 1.4

Month Price of the Basket (Prices are Not Real) Index in Points Monthly Price Rise Cumulative Price Rise
(1) (2) (3) (4) (5)
January $250 100
February $260 104 4% 4% – compared with the first observation
March $265 106 2% 6% – compared with the first observation