What is the CPI base year

Consumer Price Index (CPI)

The Consumer Price Index Indicator explained in a nutshell. Suitable for beginners and advanced users to read in.

The Consumer Price Index, or CPI for short, represents an important parameter with regard to the description of price changes on the market. The price development of a standardized shopping basket is considered, which is filled with the usual consumer goods and services of urban households, so that the purchasing behavior of around 87% of the American people. The whole point is to capture the price changes for the consumer. In the shopping cart are representative goods, the prices of which can be recorded at certain time intervals and are taken into account with a certain weight in the total price of the shopping cart.

Mainly, the CPI can be used to quantify inflation. The value of the indicator can also be used to derive the current value of salaries and price-regulating measures such as setting key interest rates or adapting social benefits. Thus the CPI is one of the most important statistical indicators of the economy and is subject to constant observation by the financial markets, but also by politics. Changes in the CPI value cause major changes in price behavior on the stock market, which is why this indicator is in the repertoire of many investors.

Survey of the CPI

The Bureau of Labor Statistics (German: Statistical Department of the American Department of Labor) collects the required data for around 23,000 stores every month, and around 50,000 representative households from 87 urban regions are also included in the surveys, by means of which the consumer behavior of the citizens is determined. After viewing the raw data, they are adjusted using statistical methods if necessary.The shopping basket consists of eight main areas:

  • Food
  • living costs
  • Clothing
  • transport
  • Health expenditure
  • leisure
  • Education and communication
  • Other (hairdresser, consumer goods such as cigarettes and alcohol, unscheduled expenses)

To ensure that the shopping basket remains representative, its exact composition is periodically checked and modified if necessary.

The data obtained from the surveys are then evaluated using the Laspeyres method by relating them to a base year. In America these are the years 1982-84; their values ​​are set to the arbitrary value of 100. Each subsequent value from the query periods is considered to determine how the price change can be expressed in relation to the base value. A percentage value is obtained which represents the inflation rate given constant wages.

Evaluation of the CPI

Since the years 1982-84 are used as reference values ​​for the CPI, this has come under fire because it is viewed as antiquated. New business sectors linked to the Internet are so skewing the results that only defining new base years could save the CPI from antiquity. This was recognized in this way, so there is a second CPI calculated with the base year 1999, which is not published regularly every month. However, this is adjusted regularly and is therefore better tailored to the current market than the original CPI.

Since the old CPI is only revised once a decade, many experts believe that it no longer corresponds to the current consumer behavior of end consumers. Nevertheless, it is precisely because of this that long-term trends and inflation rates become clearly visible, since the old CPI is very comprehensive and diversified. The time delay in publication is also minimal and is a maximum of 3 months. Due to the economic crisis at the turn of the millennium and the rapid development in the digital world, there are often demands for a younger base year to be selected, such as the interval 2004-06.

The German consumer price index

In addition to the American CPI, there is also a comparable German index, which may even be more interesting for investors in the local market. When it is created, 600 price investigators in 188 municipalities and cities determine the prices on site. In addition, a cross-location determination is carried out through catalogs or online shops. In order to be able to weight the products according to their importance, surveys are carried out every five years among 60,000 German households, which document their expenditure beforehand.

There are 12 categories in the German standard shopping cart:

  • Food and non-alcoholic beverages
  • Spirits, alcoholic beverages and tobacco products
  • Clothing and shoes
  • Warm rent
  • Home furnishings
  • Health care
  • Means of transport
  • communication
  • Leisure, entertainment and culture
  • Education
  • Accommodation and restaurant services
  • Other goods and services

In order to be able to calculate the rate of inflation, the data are weighted according to a corresponding scheme in order to obtain representativity. Using the Laspeyres method, an analogue CPI index is calculated for the base year 2005.

Due to the younger base year, the German index is more current than its American pardon. However, both indices do not take into account any replacement of more expensive goods with cheaper ones, as a fixed basket of goods is assessed. The importance of the CPI for investors in the digital options arena is that it influences investment behavior in the market. Currencies also react very quickly and sensitively to changes in the CPI, so this is very important when observing the market.

Fundamental data and market observation:

Guide ›Consumer Price Index (CPI) and its meaning