Difference Between CPI and Inflation

CPI vs Inflation

CPI and Inflation are terms related to the economy of a country. Difference between CPI and inflation has been a confusing and perplexing one. CPI (or Consumer Price Index) has been merely an attempt to measure inflation in any economy where the prices of commodity have been rising over a given period of time. It is only a tool or device to calculate the cumulative effect of rising prices and far from being perfect. There are many other tools to record inflation and all come up with results that are not always in unison with CPI. This has led to disappointment and in some cases disenchantment with the use of CPI as a method to measure inflation in some economies. Let use see the differences between the two terms.

CPI

CPI is defined as the average change in the prices of a basket of goods and services over a specific period of time. Scores of different goods and services are included in the basket and their price is ascertained every month to arrive at CPI. It is the annual percentage change in CPI that is called inflation. CPI is one statistics that is most closely watched along with population and national income in nearly all the economies of the world.

Inflation

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Suppose for any service or item you needed to pay 100 same time last year and today you need to shell out 105 for the same service or item, there is an increase of 5 in the price and thus it is said that inflation is 5%. But this is over simplifying the concept as inflation is not dependent upon a single product or service. And this is where CPI comes in handy.

It is worth mentioning that if CPI had been a fool proof system to measure inflation, people would not have felt cheated. It has been seen that governments deliberately exclude some items from the basket which is used to calculate CPI so that it remains low to deceive people.

To calculate CPI it is necessary to take a base year. And here too governments are clever enough to keep changing the base year to not let people realize how much inflation has affected their income in absolute terms. If governments keep the base year as same, inflation would appear to have increased 100’s of times so they keep changing the base year to keep it as recent as possible.

To keep the people confused governments make use of several indicators similar to CPI by including or excluding some products and services and these are RPI, PPI, Cost of Living Index, GDP deflator and so on.

CPI lets people know how inflation is affecting them in day to day living. It is a measure linked with day to day expenses. While inflation is talked about in a broader sense, CPI is discussed in smaller terms. CPI cannot explain why the price of a commodity suddenly jumped and nearly doubled in a month or so. CPI is never able to describe the actual ground position as it tries to balance out the impact of rising prices to assuage the feelings of people.

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