Final answer:
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI reflects the cost of living or inflation rate. Changing the base year for calculating CPI does not affect the calculated inflation rate since it's relative.
Step-by-step explanation:
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Prices are collected periodically and compared to the base year's prices, which reflect a CPI of 100.
To calculate the rise in the cost of living, which can also be interpreted as the rate of inflation, you use the formula for percentage increase. For instance, if the CPI goes from 2120 to 2244, the calculation would be (2244 - 2120) / 2120 = 0.0585, which converts to a 5.85% increase in cost of living or inflation rate.
To understand the impact of changing the base year, consider a basket of goods priced over four years. If year 1 is the base year (CPI=100) and year 4 has a higher total price for the same basket, creating price indices using both years as base years can help determine the change in prices over time, which reflects the inflation rate.
Regardless of the base year chosen, the inflation rate should remain consistent because it's the change in price that's important, not the absolute price levels.