The index level and its rate of change answer different questions.
CPI tracks the price of a representative basket of consumer goods and services, with weights reflecting expenditure shares. An index of 120 relative to a base of 100 means the weighted price level is 20% above that base, not that prices rose 20% this year. Different households face different spending patterns. Lower positive inflation means prices rise more slowly, not that they fall.
- Consumer prices
- The Consumer Price Index (CPI) tracks prices of a representative basket of consumer goods and services. Inflation is the rate at which this general price level rises.
- Base and weights
- The base period is the reference set to 100. Expenditure weights are shares of spending: a category taking a larger share of the basket has more influence on the index.
- Watch for this
- An index of 120 means prices are 20% above the base, not necessarily 20% higher than last year. Lower positive inflation means prices are still rising, more slowly.
Base years, weights and household experience
Rebasing
Rebasing means choosing a different reference period and setting its index to 100. It changes the scale, not the underlying prices or whether goods became more expensive.
Weights
A larger spending share gives a category more influence on the combined index. If food has a higher weight than cinema tickets, the same percentage price rise in food affects CPI more. Weights may be updated as spending patterns change.
Personal inflation
The headline basket is representative. A renter and an owner, or a commuter and a remote worker, may experience different changes in expenses.
Prices and purchasing power
Stable prices make future expenses easier to plan. Purchasing power also depends on nominal income, the money amount received: income rising faster than the prices a household faces lets it buy more. Low inflation alone does not guarantee that.
| Year | CPI | Annual inflation |
|---|---|---|
| Base | 100 | Not given |
| Year 1 | 110 | 10% |
| Year 2 | 112.2 | 2% |
Worked example: Prices still rising
CPI is 100 in the base year, 110 in year 1 and 112.2 in year 2. The supplied annual inflation rates are 10% and 2%.
- The basket is 12.2% more expensive in year 2 than in the base year.
- Prices still increased between years 1 and 2, despite lower inflation.
- A household spending a larger share on rapidly rising necessities may experience a larger cost increase than headline CPI suggests.
Watch out for this
Inflation fell to 2%, so the basket became cheaper.
The price level still rose. Prices fall when the relevant inflation rate is negative.
Check your understanding
A basket gives food a larger expenditure weight than cinema tickets. What follows?
- Food must always have a higher price.
- The same percentage price increase has a larger effect on the index for food.
- Every household spends the same proportion on food.