Navigation
How the government tracks the cost of living using a 'market basket' of goods.
If you found a time machine and traveled back to 1970, you could buy a movie ticket, a soda, and popcorn for less than 25.00 today?
Imagine the economy is a person. To see if they have a fever, you use a thermometer. To see if the economy is 'heating up' with rising prices, we use the Consumer Price Index (CPI). The CPI is a measure of the average change over time in the prices paid by urban consumers for a 'basket' of consumer goods and services. When the CPI rises, we call this inflation. This means your money has less purchasing power—you can't buy as much with a $10 bill as you could last year. The government uses this number to adjust Social Security payments and to help decide how much interest rates should be. It is the most watched indicator of how the cost of living is changing for the average family.
Quick Check
If the CPI increases from one year to the next, does your dollar buy more or less than it did before?
Answer
Less. This is called inflation, and it reduces your purchasing power.
How does the government know what prices to track? They don't look at every single thing ever sold. Instead, they use a Market Basket. This is a list of about 80,000 items that a typical family might buy. Think of it like a giant, invisible shopping cart. It includes eight major groups: Housing (rent or mortgages), Transportation (gas and car insurance), Food and Beverages (milk and cereal), Medical Care, Education, Recreation, Apparel, and Other Goods. By keeping the items in the basket the same every month, economists can see exactly how much more expensive the same lifestyle has become. If the price of the basket goes up, the cost of living has gone up.
Let's identify which items belong in a consumer market basket: 1. Milk and Bread: Yes (Food and Beverages). 2. A New iPhone: Yes (Recreation/Communication). 3. Industrial Steel for Factories: No (This is for businesses, not typical consumers). 4. Rent for an Apartment: Yes (Housing).
Quick Check
True or False: The Market Basket includes the price of heavy machinery used in construction.
Answer
False. The CPI tracks goods and services bought by typical consumers, not industrial equipment.
To find out how much prices have changed, we use a simple percentage formula. Economists pick a Base Year to serve as a starting point. They compare the cost of the basket today to the cost of the basket in that base year. The result tells us the Inflation Rate. If you want to find the percentage change between any two years, you subtract the old price from the new price, divide by the old price, and multiply by 100. This turns a decimal into a percentage. This helps us understand if our wages are keeping up with the cost of living.
If a specific 'mini-basket' of goods cost 126 this year, what is the percentage change? 1. Find the difference: 2. Divide by the original price: 3. Multiply by 100 to get the percentage: 4. The inflation rate for this basket is .
What does the CPI primarily measure?
Which of these would most likely be included in the CPI 'market basket'?
If the cost of a basket goes from 210, the inflation rate is .
Review Tomorrow
In 24 hours, try to recall the three steps for calculating percentage change without looking at your notes.
Practice Activity
Find a receipt from a grocery store. Look at the price of one item (like milk) and search online for what that same item cost 5 years ago. Use the formula to calculate the percentage change!