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What Is the Connection between CPI and Value?

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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 22 November 2016
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The Consumer Price Index (CPI) contains data related to the average cost of certain types of goods and services during a particular period of time. There is a direct link between the CPI and value because this value tracks consumer-spending power. When prices increase, the CPI rises as well, which means that consumers get less value for money when they buy goods or pay for services.

Government institutions and academics produce a variety of reports that detail expenses in different nations. In many instances, the national CPI includes the cost of goods such clothing and vehicles. Many nations have a separate CPI for home prices and for food and energy. Additionally, while a general CPI may contain data relating to costs across an entire nation, many municipal governments also gather localized data which provides local policy makers with more meaningful information.

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Economists often emphasize the connection between the CPI and value in terms of the worth of a particular currency. A commodity such as a barrel of oil has an intrinsic value but the cost of oil varies from nation to nation partly because of export costs but also because of fluctuations in currency values. Gasoline is produced with crude oil so changing oil prices affect the cost of gasoline as detailed on the index. If gasoline prices rise, it could be because the intrinsic cost of oil has risen. The cost of gasoline may also rise because the value of the local currency dropped in which gas gasoline prices would only rise on the CPI for that particular nation.

Generally, prices for most types of commodities and consumer goods tend to rise over time and economists refer to these price hikes as inflation. Consumers lose spending power due to the effects of inflation because as time goes by they have to spend increasing amounts of money to purchase the same goods. Left unchecked, inflation can cause major economic problems because prices can rise rapidly meaning that consumers are unable to afford staples such as food and energy. Consequently, government agencies and independent economists use the CPI to gauge inflation and to determine changes in consumer spending power.

Economists can also use this figure to track deflation which involves prices dropping either due to an imbalance between supply and demand or other economic factors such as severe recessions that cause consumer spending patterns to change. The CPI and value for money move in opposite directions during deflationary cycles because when the prices of goods on the CPI drops, consumers get more value for money. During inflationary cycles, the CPI and value also move in the opposite direction because prices rise while spending power and value for money go into decline.

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