Students Corner

What use is the CPI?

Have you ever wondered why your money does not seem to buy as much as it used to? Over time your money loses purchasing power. It does so because of inflation. Put simply inflation is the rate at which your money loses its ability to buy things. The CPI is the official measure of inflation in Ireland.

You can use the CPI to measure the decline in the value of money. For example, you might wish to check whether wages have kept pace with prices.

Table 1

Table 1 shows that prices increased by 4.9% between March 2002 and March 2003. In other words the annual rate of inflation to March 2003 was 4.9%.

What does this really mean? It means that between March 2002 and March 2003 money fell in value by 4.9%. If I had €1 in March 2002, I would need €1.049( or €1.05) in March 2003 to have the same purchasing power. In other words I would need 4.9c (or almost 5c) extra to be able to buy the same basket of goods and services that I bought last year. Alternately you could lok at it in reverse and say I only needed 95.3c last year to buy what I need a €1 for today.

Example 1:
For every euro I had in July 2002 I would need 1 euro and 3.7c in March 2003 to purchase the same basket of goods and services. So if I had €10 in July 2002 I would need €10.37 in March 2003. Use this formula to work it out:

Formula 1:

then

Example 2:
If I had €50 in October 2002, I would have only needed €47.89 in January 2002 to purchase the same basket of goods and services. The additional €2.11 needed to purchase the same basket of goods and services in October reflects the increase of 4.4% in the average level of prices between January and October.

Example 3:
Suppose I had €211 to spend in December 2002. If I had waited until January 2003, I could have bought the same basket of goods and services for €210.20.

Remember -

• The CPI measures prices for a basket of goods and services.
• CPI measures inflation.
• Inflation is the rate at which your money loses its ability to buy things.