Consumer Price Index (CPI): What It Is and How It’s Used

Consumer Price Index (CPI): What It Is and How It’s Used

Consumer Prices Index CPI

The National Bureau of Statistics (NBS) periodically releases inflation figures, and we may wonder how these figures are tracked, or how they come about. This is usually tracked by an index called the consumer price index. In this article, we look at the makeup of the CPI, its function uses and the methodology behind the calculation.

What is the Consumer Price Index?
The CPI essentially measures the average change in prices for a set of essential goods and services. Think of it as a snapshot of what it costs the average Nigerian to maintain their standard of living. This basket of goods includes everything from groceries to housing expenses, providing a practical lens through which we can gauge economic shifts or economic cycles. This index is crafted using economic theory, sampling, and statistical techniques, involving a team of economists, statisticians, computer scientists, and data collectors.

How is the CPI calculated?

The National Bureau of Statistics is the body in charge of calculating the CPI. They collect data across the nation, keeping tabs on the prices of items in the basket. These prices are then weighted based on how important they are to the average consumer, creating a weighted average that becomes the Consumer Price Index. Let’s take a step-by-step look at how the CPI is calculated.

Market Basket Selection

Every month, around 10,534 informants nationwide contribute data on 740 goods and services that represent what Nigerians typically consume.

Calculating Averages

Prices are averaged for each item in both rural and urban areas across states. This gives us a baseline for further calculations.

Basic Index Calculation

The current year’s prices are compared with a base year, giving us a relative price for each item.

Laspeyres Formula

Using a fancy formula, an aggregated index is calculated for each group of items with similar purposes. The Laspeyres formula is a mathematical approach used to calculate price indices, such as the CPI, by comparing the cost of a fixed basket of goods and services at current prices to the cost of that same basket in a base year. In simpler terms, it helps us understand how the overall price level has changed over time by focusing on a constant set of goods and services.

The formula involves two primary components:

CPI Calculation
CPI Calculation

Cost of Basket in Current Year: This represents the total expenditure on the selected basket of goods and services in the present period.

Cost of Basket in Base Year: This denotes the total expenditure on the same basket of goods and services in the chosen base year.

Index Classification

The results are classified based on urban or rural sectors for each state, eventually creating various indices like the Country Composite Index and Urban and Rural National Indices.

Why the CPI Matters

Economic Health Indicator

The CPI is like a health check for the economy, especially in terms of inflation. It tells us how prices are rising and it guides policymakers, including those at the Central Bank, in making decisions about interest rates and monetary policies. Components of the Laspeyres Formula:

Impact on Daily Life

Fluctuations in the CPI affect the cost of living. It influences consumer behaviour, purchasing power, and the delicate balance between income and expenses for the average household.

Impact on Businesses

Understanding the CPI is crucial for businesses. It helps in planning changing costs, adjusting prices, and making informed financial decisions.

Final thoughts?

The Consumer Price Index is a very important economic indicator, as it helps us track how the prices of goods are changing. This helps in economic planning and even personal planning. Thus, staying up to date will the CPI is very important for businesses and individuals alike.

FAQs

What is the Consumer Price Index (CPI)?

The CPI is a measure that tracks the average change over time in the prices of goods and services consumed by people for day-to-day living. It serves as a crucial indicator of inflation in the Nigerian economy.

How is the CPI constructed?

The construction of the CPI involves a meticulous process. A market basket of 740 goods and services is selected monthly, with data collected from 10,534 informants across the country. Prices are then averaged, and a weighted index is calculated using the Laspeyres formula.

Who is involved in the production of the CPI?

The production of the CPI requires a collaborative effort. Economists, statisticians, computer scientists, and data collectors all play crucial roles in ensuring the accuracy and reliability of the index.

What are the key components of the CPI?

The CPI is composed of various indices, including the All Items Index, and Imported Food Index, and breakdowns into 12 Classification of Individual Consumption by Purpose (COICOP) functions. These components provide a comprehensive view of inflation trends.

How often is the CPI released?

The CPI is released monthly, providing a regular update on inflationary trends in the Nigerian economy.

Where can I find updates on the CPI

The CPI can be found on the NBS Website

Sign up for the newsletter

If you want relevant updates occasionally, sign up for the private newsletter. Your email is never shared.

Home

Marketplace

Learn

My Items

Home

Marketplace

Learn

My Items

More