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FINANCE GUIDE: CONSUMER PRICE INDEX

This guide will cover important topics like simple interest, compound interest, consumer price index (CPI), and the tax system in America. Gaining an understanding in these topics can help you manage your finances more efficiently.

INTRODUCTION

In a world full of monetary values, people need to realize that money’s value changes based on the consumer price index and the rate of inflation. If you start a job and do not receive a raise in four years, then your salary is not adjusted for inflation and you could make less money.

WHAT IS CONSUMER PRICE INDEX (CPI)?

  1. Helps us measure the increase of cost of goods and services over time.
  2. Inflation affects the value of a good or service, so we cannot compare prices from 2 different time periods without adjusting one of those values based on the CPI value of that time period.
  3. Basically, we are converting the dollar value from one time period into the dollar value in another time period.
  4. For example, $5 in 1980 could be valued at $7 in 2000 because of inflation.
  5. In addition, we can calculate the inflation rate when we have 2 CPI values.

HOW DO WE CALCULATE PRICE ADJUSTMENT AND THE RATE OF INFLATION?

Price adjustment from 1 year to another:

 

Rate of inflation:

As you can see in the formulas, CPI is an important piece of information. You can find the CPI values on the internet on a chart:

LOOKING AT CPI OVER TIME

Over time, inflation has caused a great increase.

HERE ARE SOME QUICK EXAMPLES

Price adjustment:

Rate of inflation:

VIDEO WITH EXAMPLES AND HELPFUL CPI CALCULATOR

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