CPI vs. Inflation

Understanding the difference between CPI and inflation

CPI (consumer price index) and inflation are two commonly used and important terms related to the economy of a country. The difference between the two terms is confusing because they have such a close relationship. The CPI is a way of measuring the rate of inflation when the prices of goods and services have been rising over a period of time. It is not perfect and is only an estimated calculation of the effect that rising prices have on the overall economy. Other tools are also used to measure inflation and the results sometimes are not the same as those of the CPI. As a result some people are less inclined to depend on the CPI for this purpose.

What is CPI?

A basket of goods that consumers buy on a regular basis is compared over a specific period to time to measure the rise that occurs in prices. This average increase is called the CPI or the consumer price index. The price of the list of products or goods is checked every month and the annual percentage change that occurs is called inflation. It is a statistic that economists all over the watch very carefully in addition to population and salaries.

What is inflation?

When the price of goods and services rise over a specific period of time the increase is called inflation. If you pay $105 for the same products this year for which you paid $100 last year, the increase of $5 is a 5% increase in inflation. However, inflation is more complicated than this, which is why CPI is used as one of the calculations.

The fact is that CPI is not always correct and people have become very disenchanted with the statistics and feel cheated. This is because sometimes governments deliberately exclude some products from the analysis resulting in a deceptively low CPI.

You have to start with a base year when you calculate CPI. Governments keep changing the base year so this also deceives the population. If the base year remained the same inflation would be 100% more than what the actual reports say that it is.

CPI is used to inform people how inflation affects them from day to day. It cannot explain why the price of something jumps suddenly and it is never able to accurately describe the ground position so that people will understand the balance of rising prices.