What is the Consumer Price Index (CPI)?The Consumer Price Index (CPI) is a measure of changes over time in the general level of prices of goods and services, which the private consumer buys or pays for. It is measured by computing the average change over time in the cost of a fixed market basket of consumer goods and services. As prices change, the total cost of the basket also changes and thus the CPI is a measure of the change in the cost of this fixed basket. It provides a way to compare what this basket costs at a given period relative to a reference or base period.
How is the CPI basket determined?
The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Household Budget Survey conducted (in both the Islands of Mauritius and Rodrigues) in 2006/07. From July 2006 to June 2007, more than 6,700 households from around the country provided information on their expenditure by item in a series of monthly interviews. On the basis of this information, the compounded expenditure of all households in the country has been estimated for each item e.g. bread and electricity. The items forming part of the CPI basket are then selected according to their importance in terms of expenditure. The basket includes all items on which consumption expenditure is significant, i.e. accounting for around 0.1% or more of total household consumption expenditure.
What are CPI weights?
CPI weights refer to the relative importance of the items in the CPI basket in terms of their expenditure share. For instance, in the current CPI basket, the proportion of total household expenditure on bread is 2.1% and therefore the weight of bread which is usually expressed as a figure per 1000 is 21. The weight of an item determines impact that a particular price change will have on the overall consumer budget. An item which carries more weight (e.g. bread with a weight of 21) has a greater impact on the overall consumer budget than one with a lesser weight (e.g. butter with a weight of 2) if both are subject to the same price change.
What goods and services does the CPI cover?
The CPI covers all goods and services purchased by household for consumption. These goods and services are classified into 12 major divisions as follows:
Division Weight
Food and non alcoholic beverages 286
Alcoholic beverages and tobacco 92
Clothing and footwear 51
Housing, water, electricity, gas and other fuels 131
Furnishings, household equipment and routine household maintenance 64
Health 30
Transport 147
Communication 36
Recreation and culture 48
Education 32
Restaurants and hotels 43
Miscellaneous goods and services 40
The following items, which do not fall within the scope of the CPI, are excluded:
(i) income tax, savings, life insurance premiums and social security contributions;
(ii) investment-related items such as purchase of land, houses, shares, etc.;
(iii) expenditure associated with gambling;
(iv) goods and services received free from government (such as education and health) and from other sources;
(v) consumption of own-produced goods and services e.g. vegetables grown and consumed by the household, rental value of owner-occupied and free housing;
(vi) travelling expenses to work (since these are intermediate expenses for the employer).
How is the CPI calculated?
The CPI is calculated monthly as the change over time in the cost of the CPI basket. For this purpose, prices of each item in the CPI basket are collected each month by trained CSO staff and enter in the CPI calculation. The CPI is computed according to the Laspeyres formula as a weighted average of price relatives of individual items as follows:
å Wi (Pit / Pi0 )
I t = X 100
å Wi
where,
I t : CPI for period t with reference to a base period 0
Pio : Price of item i at time 0, i.e. during base period
Pit : Price of item i at time t
Wi : Weight of item i
How are CPI prices collected?
Each month, trained price collectors from the CSO collect prices from various sources such as retail stores, supermarkets, pharmacies, doctors' offices, private schools etc. Prices are collected according to strict procedures. The prices used in the CPI are those that any member of the public would be paying to purchase the specified good or service in specific outlets and regions. Any value added tax (VAT) or excise duty attached to the products is included. Sale and discount prices are taken into account so long as the products concerned are of normal quality. However, no account is taken of black market prices.
The frequency of price collection varies as necessary to obtain reliable price measures. Prices of non-perishable goods are collected monthly, from the 12th to the 18th of each month. For perishables whose prices vary many times during a month, price collection is done on a weekly basis. In contrast the amount charged for rent does not change so much over time; consequently information on rent is collected every quarter by surveying some 100 households paying rent.
The prices that enter in the CPI computation should be comparable over time. They refer to the same quantity and quality of each item, to the same sellers and even to the same method of pricing. For instance, prices of fresh vegetables are collected in a particular market within the same time period and on the same day of the week.
How often is the CPI basket updated?
In Mauritius, the CPI basket is updated every 5 years following the conduct of a Household Budget Survey to account for changes in the consumption pattern of the population .
Why is the CPI basket not updated more frequently than every 5 years?
This is not warranted since the consumption pattern of the population changes slowly over time and 5 years is considered a reasonable interval.
Why is it that the CPI does not reflect my price experience?
The CPI does not reflect the price experience of individual household since it is designed to measure the price changes experienced by all Mauritian households in aggregate. For example, it would be unusual to find a household paying rent for its dwelling and also paying municipal tax on this property. However, both rent and municipal tax are included in the CPI since they are important in the spending pattern of Mauritian consumers as a whole .
Is the Consumer Price Index (CPI) a cost of living index?
The CPI is not a cost of living index. The cost of living index is much broader in concept and measures changes over time in the amount that consumers need to spend to reach a certain standard of living. In addition to price changes, this index takes into account changes in other factors that affect consumers’ well being such as safety, education, water quality, proper treatment of public goods, etc. Another difference is that the cost of living index should reflect changes in buying patterns that consumers make to adjust to relative price changes e.g. buying canned tomatoes rather than fresh tomatoes when prices of fresh tomatoes go up. The CPI, on the other hand, is constructed by reference to a fixed basket of goods and services that does not reflect changing consumer preferences and substitutions made when prices change. It is to be noted that so far, no acceptable methodology has been devised to compile a true of cost of living index .
How is the CPI used?
(i) The CPI is the most widely used measure of inflation. It plays a major role in formulating the monetary and fiscal policy of government. It is often used to assess the effectiveness of government economic policy.
(ii) The CPI is commonly used for adjustment of wages, pensions and social security benefits to compensate for erosion of purchasing power as prices increase. Furthermore, many financial arrangements make use of the CPI. For instance, payments associated with private contracts, insurance premiums, rent, alimony, etc. are often indexed on the CPI
(iii) The CPI is also resorted to for the conversion of a series measured at current prices to a constant price series. Such conversion which is known as deflation, gives a better indication of changes in real terms (volume) by adjusting for price changes. For example, the CPI is often used to deflate the value of the rupee to calculate its purchasing power .
Is the Consumer Price Index (CPI) the best measure of inflation?
Inflation has been defined as a process of continuously rising prices, or equivalently, of a continuously falling value of money. Various indices have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production and marketing process; the Export Price Index (EPI) measures it for exports; the Import Price Index (IPI) measures it for imports; and the Gross Domestic Product Deflator (GDP-Deflator) measures the overall inflation of governments (Central and Local), businesses and consumers. The "best" measure of inflation for a given application depends on the intended use of the data
Updated on:13.08.08
