Final answer:
The Consumer Price Index (CPI) weighs goods and services based on their proportion of consumer spending, with greater weights assigned to items that are purchased more frequently, such as housing. Consequently, changes in the prices of heavily weighted categories have a more significant impact on the overall CPI than those of lightly weighted items.
Step-by-step explanation:
The Consumer Price Index (CPI) is calculated by the U.S. Bureau of Labor Statistics and represents the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI does give greater weight to goods that consumers purchase more of. For example, within the CPI's basket, housing has the highest weight at approximately 42.7%, reflecting its importance in consumer spending. Whereas apparel, having a smaller portion of consumer spending at 3.3%, carries less weight in the CPI calculation.
Changes in the prices of goods that occupy a larger share of consumer spending, such as housing, significantly impact the overall CPI, while changes in lesser-weighted categories like apparel have a smaller effect on the index. This weighted approach ensures that the CPI more accurately reflects the cost of living for the typical urban consumer, measuring how price changes affect the actual expenditures of consumers.
Therefore, the CPI is a weighted average, where the weights are based on the actual quantities of goods and services people buy. An increase in the price of a heavily weighted item, such as housing, would thus have a more substantial effect on the CPI than an equivalent increase in the price of a lesser-weighted item, like apparel.