Question

Use the information in the table to calculate a consumer price index (CPI) and the inflation rate. The base year is 1975. Round answers to two decimal places.

Market basket	Quantity	1975 prices	1976 prices
A dozen eggs	2929	$1.10$1.10	$1.70$1.70
Calculator	1919	$15.00$15.00	$17.00$17.00
Microwave oven	99	$180.00	$230.00

What is the CPI for 1975?

What is the CPI for 1976?

What is the inflation rate for 1976?

Answer 1

CPI in X = [(Market value of Basket in X)/(Market value of Basket in Base Year)]*100

(i)

Here Base year = 1975

So CPI in 2005 = [(Market value of Basket in 1975)/(Market value of Basket in 1975)]*100

= 100

Note, CPI of Base Year is always 100

(ii)

Here Base year = 1975

So CPI in 1976 = [(Market value of Basket in 1976)/(Market value of Basket in 1975)]*100

= [(2929*1.7 + 1919*17 + 99*230)/(2929*1.1 + 1919*15 + 99*180)]*100

= 121.164

Hence CPI in 1976 = 121.164

(iii)

Inflation rate = (Change in CPI/Initial CPI)*100

=> Inflation in 1976 = ((121.164 - 100)/121.164)*100

= 21.164

Hence, The inflation rate for 1976 = 21.164