Lesson: Consumer Price Index

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, demystifies the Consumer Price Index (CPI), showcasing it as a vital indicator of inflation through a detailed exploration of its underlying calculations. With his usual flair for making complex concepts accessible, Nick delves into the percent change formula, illustrating its applicability to everyday scenarios like stock price movements and changes in grocery costs. By comparing historical and current CPI values, he clarifies how inflation rates are determined, stressing the significance of understanding these changes over set periods. Furthermore, Nick expands on how the CPI relates to household expenditures, emphasizing its impact on personal finances. He also introduces the Producer Price Index (PPI), drawing parallels and distinguishing its focus on the costs borne by producers. Through practical examples, Nick ensures that the quintessential percent change formula is not just a theoretical concept but a practical tool for interpreting economic trends and personal financial analysis.

Updated: May 31, 2022 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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CPI and percent change. Why do I call it percent change? Because it's essentially just a percent change formula for those of you who are familiar with it or not. Percent change formula is anything to use it for, anything that has a changed price. So if your stock went up by $10, right.

Oh, okay, well, your stock was at $100. Now it's at $110. 110 -100 is 10, divided by the old price of 100. So that's a 10% increase. Right.

10% change, that's good. I mean, sometimes percent change can be bad if it's the same numbers. But for how much it costs to get a week's worth of groceries, that would mean that it costs now 10% more. It costs 10% more to buy groceries. That's the same thing for the inflation rate.

So if the CPI, this is Consumer Price Index, increased by, let's say normally inflation is 2%, right? So 2%, we've got old 2% last period, now we've got new percent at 5%. Well, we do a little math here. Five divided by two, then we're actually going to have an increase in inflation. Not good, not good at all.

It increased by 50%. There, you hate to see it. That's 1.5, that's a 50% increase. So that's kind of what we're dealing with here. And that gives you the inflation rate.

So that would be a 50% increase in inflation. That's not good at all. So Consumer Price Index, as we said, it's a measure of overall cost of a fixed basket of goods and services purchased by the average household. And that's calculated as the current cost of the market basket compared to the base year cost of the market basket. So if generally for all of your monthly expenses for a household, you have to

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