Practice question · Put in order
Order the steps of computing annual inflation with a CPI.
- Price the basket in the base year (index = 100)
- Divide this year’s cost by the base cost
- Define the fixed basket of consumer goods
- Price the same basket this year
- Report the percentage change as inflation
Hints
- The basket must be fixed before it can be priced twice.
- Comparing the two totals is the final step.
Show the answer
- Define the fixed basket of consumer goods
- Price the basket in the base year (index = 100)
- Price the same basket this year
- Divide this year’s cost by the base cost
- Report the percentage change as inflation
Why
Fix the basket, price it twice, compare. Everything else in inflation measurement is footnotes to those three moves.
Practise Macroeconomic Indicators
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