Definition: Consumer price index (CPI)

Category: ILO terminology

The various definitions presented below are all taken from ILO (International Labour Organization) documents

Definition 1) The purpose of a consumer price index is to measure changes over time in the general level of prices of goods and services that a reference population acquire, use or pay for consumption. A consumer price index is estimated as a series of summary measures of the period-to-period proportional changes in the prices of a fixed set of consumer goods and services of constant quantity and characteristics, acquired, used or paid for by the reference population. Each summary measure is constructed as a weighted average of a large number of elementary aggregate indices. Each of the elementary aggregate indices is estimated using a sample of prices for a defined set of goods and services obtained in, or by residents of, a specific region from a given set of outlets or other sources of consumption goods and services.

The uses of a consumer price index and their relative importance vary from country to country. They include:

(a) general economic and social analysis and policy determination;
(b) negotiation or indexation, or both, by government (notably of taxes, social security benefits, civil service remuneration and pensions, licence fees, fines and public debt interest or principal) and in private contracts (e.g. wages, salaries, insurance premia and service charges) and in judicial decisions (e.g. alimony payments);
(c) establishing "real" changes, or the relationship between money and the goods or services for which it can be exchanged (e.g. for the deflation of current value aggregates in the national accounts and of retail sales); and
(d) price movement comparisons done for business purposes, including inflation accounting.
Sub-indices rather than the all-items index may be suitable for some of the above uses.

(Source: Resolution concerning consumer price indices, adopted by the Fourteenth International Conference of Labour Statisticians (October-November 1987)

Definition 2) Consumer price indices (CPIs) are index numbers that measure changes in the prices of goods and services purchased or otherwise acquired by households, which households use directly, or indirectly, to satisfy their own needs and wants. Consumer price indices can be intended to measure either the rate of price inflation as perceived by households, or changes in their cost of living (that is, changes in the amounts that the households need to spend in order to maintain their standard of living). There need be no conflict between these two objectives. In practice, most CPIs are calculated as weighted averages of the percentage price changes for a specified set, or basket, of consumer products, the weights reflecting their relative importance in household consumption in some period. Much depends on how appropriate and timely the weights are. 

Definition 3) The CPI is an index that measures the rate at which the prices of consumption goods and services are changing from month to month (or from quarter to quarter). The prices are collected from shops or other retail outlets. The usual method of calculation is to take an average of the period-to-period price changes for the different products, using as weights the average amounts that households spend on them. CPIs are official statistics that are usually produced by national statistical offices, ministries of labour or central banks. They are published as quickly as possible, typically about ten days after the end of the most recent
month or quarter.

A CPI measures the rate of price inflation as experienced and perceived by households in their role as consumers. It is also widely used as a proxy for a general index of inflation for the economy as a whole, partly because of the frequency and timeliness with which it is produced. It has become a key statistic for purposes of economic policy-making, especially monetary policy. It is often specified in legislation and in a wide variety of private contracts as the appropriate measure of inflation for the purposes of adjusting payments (such as wages, rents, interest and social security benefits) for the effects of inflation. It can therefore have substantial and wide-ranging financial implications for governments and businesses, as well as for households. http://www.ilo.org/public/english/bureau/stat/guides/cpi/index.htm