Question

A given basket of consumer goods costs: $150 in year 2001; $180 in year 2002; and $198 in year 2003.

a. Why was the cost of living in year 2000 lower or higher than in year 2001? Why?

b. If the CPI in 2003 was 145, does it mean that a consumer price inflation in 2003 was 45 percent?

Answer 1

a. Cost of living in 2000 was higher than 2001 , as estimates shows that successive growth in price year wise tends to be lower. CPI =( cost of some basket in the current year/cost of same basket in the base year)×100

So CPI for 2002 with base 2001=( 180/150)×100= 120

And CPI for 2003 with base 2002= (198/180)×100 =110

b. No it doesn't mean that, it means price level has risen by 45% between 2003 and the  base year. If base year is 2002 , then the given statement is true.