Consumer Price Index (CPI)

Definition

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Sometimes referred to as "headline inflation."

The Consumer Price Index is a statistical measurement usually used to describe changes in the retail price of goods and services in a particular area, region, city, or country. In the United Kingdom, it is called the Retail Price index. The Consumer Price Index compares the current cost of certain goods and services with their cost at an earlier time.

The index is based on the price of a selection of items bought by a typical household. Each item is given a share of the index, depending on its importance to the household. The total cost of these items at a specific point in time is then given a value, usually 100. This value provides the base of the index. Researchers rec­ord subsequent changes in prices, and the index rises or falls according to the changes. For example, an aver­age household may have spent 200 British pounds a week on clothing, food, rent, and other items, such as televisions and refrigerators, during the base period of the year 1985. If all these costs doubled over the follow­ing ten years, the index in 1995 would be 200. The index would show that consumer prices had risen by 100 per cent over the ten-year period.

Items included in the index vary from country to country. In developed countries, the index will reflect the lifestyles of the people and may include such items as television sets, video recorders, washing machines, and holiday travel. In less developed countries, the index will be taken up almost entirely with the cost of clothing, food, and travel to work, which are the most important items purchased by the average household.

Governments usually measure changes in the Consumer Price Index every month, every four months and every year. The index is the usual measure of a country's inflation rate and is an important indicator of economic performance. Many government and private organizations use the index as a yardstick for revising wages and other payments to keep pace with changing prices. See also Cost of living; Inflation.

Consumerism includes activities by consumers them­selves, as well as government action. The movement seeks to provide adequate information about products so that consumers can make wise decisions in purchas­ing goods and services. Consumerism also tries to in­form consumers of effective means of obtaining com­pensation for damage or injury caused by defective products.

Consumer groups exist in many countries. In Britain, for example, the Consumer Association tests goods and investigates services, and then publishes the results. In Australia, there are consumer affairs agencies in the states and territories. In developing nations, consumer­ism is gaining strength, but it is still confined largely to urban areas. Such groups campaign for improvements in consumer-protection legislation and agencies.

The rise of the consumer movement has had major effects on business and industry. Many companies have become more responsive to the needs, wants, and safety of consumers. Other firms have not been respon­sive to these concerns. Some of them have experienced financial losses and unfavourable publicity resulting from legal action by dissatisfied consumers and govern­ment-ordered recalls of defective products.

The consumer's rights

Consumer groups and many other people believe consumers have several basic rights. For example, they believe consumers ?re entitled to (1) products whose quality is consistent with their prices and the claims of manufacturers; (2) protection against unsafe goods; (31 truthful, adequate information about goods or services; and (4) a choice among a variety of products. Buyers also have certain responsibilities. For example, they must use a product for the purpose intended by the manufac­turer, and they should follow the instructions provided with the product.

The right to quality. Warranties and money-back guarantees provide assurances that a product will live up to the claims of the manufacturer. Most warranties are written statements that promise repair, replacement, or a refund if a product fails to perform as the manufac­turer said it would for a certain period of time. A money- back guarantee promises a refund of the purchase price if the buyer is not completely satisfied.

Legislation requires that warranties are written clearly so they can be easily understood by the consumer. They also give the consumer the right to an implied warranty, an unwritten guarantee that the product is suitable for the purpose for which it has been sold. For example, a hairdrier should dry hair.

The right to safety. Legislation in many countries provides that food must be pure, wholesome, and fit for human consumption. Safety in another form is ensured by enabling a person injured by certain defective goods to sue the seller. Standards authorities exist to improve the safety and quality of many products, such as electri­cal goods and other household items. Such authorities do not always have legal powers effective against manu­facturers. They simply test goods and recommend those ₀f the best quality.

The right to information. Advertising is an impor­tant means by which manufacturers and sellers give in­formation to consumers. Regulations prevent advertis­ers from making fraudulent or untruthful claims. Consumers also acquire information through labelling on goods. This labelling is also regulated by law. Pack­aged food must be labelled to show contents and weight, and the manufacturer's name and address must be given. Dates on food products show how fresh they are.

Certain types of selling are specially regulated by law. Door-to-door selling and the sale of goods on hire pur­chase or other instalment plans are regulated so that consumers have the right to wait a short time before making up their minds whether to buy or not. Legisla­tion ensures that sales documents signed as part of credit agreements are clear, and contain all the condi­tions of sale, and that the sale is not legally binding im­mediately.

The right to choose. In many countries, the govern­ment regulates business to promote free and fair com­petition. Legislation prevents business from forming monopolies. Where a monopoly exists, consumers are forced to buy from one manufacturer, who then has un­restricted freedom to charge high prices.

History of the consumer movement

Early buyer-seller relationships. Some of the first attempts to protect consumers occurred during the Middle Ages. Guilds established by craftworkers set standards for products sold by their members. Another form of early consumer protection consisted of laws against usury, the lending of money at an excessive rate of interest. These laws regulated the rate of interest that moneylenders could charge borrowers.

Nevertheless, the market place was ruled by the prin­ciple of caveat emptor, a Latin phrase meaning let the buyer beware. People made most purchases from local shopkeepers or craftworkers and were responsible for detecting faulty merchandise. If dissatisfied with the quality or price, they complained directly to the person who made or sold the product.

Beginnings of consumerism. During the late 180CTs and early 1900's, the sale of many impure and unsafe products led to increased consumer interest in legisla­tion that established standards of quality.

During the 1950's and 196CTs, consumer awareness in­creased, particularly in the United States, as a result of efforts by various crusaders.

During the 1970's, a period of inflation, consumers became increasingly effective in exercising their rights.

Inflation helped the growth of consumerism because of greater public concern about the cost and quality of products when prices go up continually.

Related articles Advertising, Nader-Ralph, Clothing (Protecting the public) Sinclair, Upton Monopoly and competition Textile (The textile industry).

Cost of living is the amount of money needed to buy a standard amount of consumer goods and services.

Needs of individual persons and families vary. Everyone needs food, clothing, and shelter, but wants go beyond these bare necessities. The cost of living may include the cost of transportation, reading, recreation, rent, electricity, gas, fuel, home furnishings, medical and per­sonal care, taxes, and many other things.

When salaries and wages rise at the same rate as the prices of consumer goods and services, the worker's buying power remains stable. When prices rise, people with fixed incomes, such as pensions, fall behind in buy­ing power. Changes in the cost of living have many causes. For example, when the buying of consumer goods increases faster than the nation's ability to pro­duce them, prices tend to go up. But when more goods than money are available, prices go down.

Most governments have a ministry and statistical de­partment responsible for the collection and analysis of data on employment, wages, and productivity. It will also collect data to measure changes in the prices of consumer goods and services, and report its findings through publications. It publishes a Consumer Price Index that summarizes this information. Preparation of this index involves the regular collection of information on prices and costs from thousands of food stores, homeowners and tenants, and other sources.

A system called indexing or indexation is being in­creasingly used to tie prices, wages, and taxes to the rate of inflation. Indexing provides for automatic in­creases and decreases in prices, wages, and taxes as the official cost-of-living index rises and falls. For example, some contracts of employment have an escalator clause, which automatically lifts wages as the cost of living in­creases. See also Inflation.

Standard of Living - usually refers to the economic  level achieved by an individual, family, or nation. It may be measured by the value of the goods and services produced or used by the individual, family, or nation in a given period of time. Another interpretation of standard of living is based on the goals that people set for  themselves as consumers. That is, when people have  enough material things for comfort and happiness, they have achieved their standard of living.

How standard of living is measured. There are several major ways of measuring standard of living. All present problems of interpretation. They do not always provide enough information or the right information

A nation's living standard may be estimated by determining the proportion of income that "average" citizens spend on certain basic necessities. One basis for comparison is the amount spent for food. According to this

measure, the greater the proportion of income spent on food by individuals in a nation, the lower the nation’s living standard. But this measure provides only basic information and does not reveal anything about actual level of consumption. Also, economists cannot easily determine the proportion of individual incomes spent or food and nonfood items.

Another commonly used measure of the standard of living for a nation is obtained by dividing a figure called the private consumption expenditure by the population of the nation. The private consumption expenditure, also called the personal consumption expenditure, represents the value of goods and services bought by individuals in the nation over a period of time. But this measure also has drawbacks.

The measure presents a figure for the average citizen of the nation. But such an average does not reveal the distribution of the standard of living in the nation. For example, two nations whose per capita (per person) consumption expenditures are valued, in U.S. dollars, at $1000 each year may differ widely. In one nation, all the individuals may spend about $1,000 each. In the other nation, a few rich individuals may spend much more then $1,000 each and many poor individuals may spend much less than this. The second country has a poorer  standard of living for most people, but the measure does not reflect it.

Another drawback to the private consumption measure is that it is not reliable for making international comparisons. There are several reasons for this problem. For one, the official exchange rate with the U.S. dollar may not accurately reflect the purchasing power of the local currency. Thus, $100 may actually buy very different amounts of goods in different nations. Second, the availability of goods and services differs widely in different nations, a variation that directly affects the ability of the citizen to attain their goals as consumers. Third, nations differ in their ideas concerning consumption. The basic does needs of individuals include food, clothing, and shelter. However, there are a number of needs that are regarded as basic in some countries and as unimportant in others. Tastes and preferences also differ.

In addition, the private consumption expenditure does not account for some of the social costs associated with citizenship in an industrial society. Certain industrial nations—including Canada, Japan, the United States, and many countries of western Europe—are said to have the world's highest standard of living. But they also have pollution and overcrowding, which may make life unpleasant in parts of these nations.

Economists also measure standard of living in several other ways. They may divide the amount that a nation produces each year by the number of its population. They also may calculate the average personal income earned by people in a country. This average income, less the amount paid in taxes, shows how much people have to spend or save. It is often adjusted to take chang­ing prices into account. However, these measures of standard of living have some problems and limitations.

Area differences. Standards of living vary widely across the world. The world supports more than 5 bil­lion people. At the U.S. standard of consumption, the world produces enough grain for only about half the total population. By the Chinese standard, however, there is enough grain for about 7 billion people. West­ern Europe's level of grain consumption falls roughly halfway between those of the United States and China. In fact, people in poor countries eat more grain than those in wealthy countries, where much grain is used as feed for animals.

Total food supplies also differ greatly among coun­tries. Some of these differences have been studied by the Food and Agriculture Organization (FAO), a special­ized agency of the United Nations. For example, FAO es­timated that the United States had enough food during the late 1980's to provide each person in the country with 139 per cent of the total calories necessary every day. China had 117 per cent of the necessary total. Cana­da's food supply was 114 per cent of its needs, but India had only 93 per cent. Bangladesh had 89 per cent of the food required for its people, while in Mozambique there was only 71 per cent of the estimated needed minimum.

More goods per person are consumed in industrial countries than in developing nations. In general, people in industrial nations enjoy better clothing and housing, greater educational opportunities, and more healthy food than people in chiefly agricultural countries. Related articles: Consumption,  Income, National income, Cost of living, Industrial Revolution, Technology, Gross domestic, Inflation, Wages and hours.

Take Note:

A measure of standard of living - The standard of living for a nation is sometimes measured by dividing its private consumption expenditure by its population. The expenditure represents the value of goods and services bought by individuals in a nation during a given period of time.