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A consumer price index (CPI) represents the cost of a basket of goods and services typically used by consumers who live in certain areas; this basket is referred to as the market basket. The index is calculated by government economists at regular intervals, such as once a month, and many government agencies and private organizations rely on this statistic to determine the rate of inflation. CPI weights refer to the percentage of the market basket that is represented by each component of the index.
CPI weights typically are based on the expenditures of hundreds or thousands of families who keep detailed spending reports during a certain time period, such as a two-year span. Economists then determine the importance of the most commonly used items. For example, housing is the largest expense category in many areas, with a CPI weight often representing about 40 percent of the index. Food typically is the second-highest category, accounting for 10 to 20 percent of the CPI and of sample household expenditures.
Within each category, spending is broken down into smaller units. Within the category of food, eating at home and dining out are each given a CPI weight. The index drills down to the level of detail for specific ingredients, such as coffee that is consumed at home, apples or other specific types of food. After the CPI weights for each of the items are determined, survey data on the price of the goods or services is collected to calculate the value of the index.
CPI weights allow economists to account for the effect of price changes on the average household and to monitor which price increases are going to most affect consumers. For example, a shortage of apples that results in a cost increase will not affect a family as much as an increase in the cost of housing that is caused by higher interest rates. This information provides a basis for economic policy and is widely watched by financial markets around the world.
Another important use of the CPI is to provide cost-of-living adjustments for government programs that provide financial support for people such as the poor and the elderly. As prices rise, the government often ensures that these payments increase to cover higher living costs. The use of CPI weights allows for greater accuracy than using a broader index, such as inflation, to determine these increases.
CPI weights typically are recalculated when there has been a significant shift in consumer spending patterns, such as every two to four years. For example, the cost of wireless telephone services has been a growing area of spending in the early 21st century. Information from censuses also allows for fine-tuning of the CPI, particularly in the geographical regions from which the samples are taken.
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