A CPI market basket represents all the goods and services that the population purchases for consumption. The cost of a market basket is used to determine the CPI index, which indicates how much prices have changed over time. To calculate the cost of a CPI market basket, multiply basket prices for each category by the predetermined weight and sum the results.
Determine the Items in the Market Basket
Determine the types of goods that the population purchases and group them into categories. According to the Bureau of Labor Statistics, the major categories in the CPI market basket are:
- Food and beverage
- Education and communication
- Medical Care
- Other goods and services
Assign a Weight to Each Item in the Basket
Assign a percentage weight to each item category based on how often your population purchases items in each category. The Bureau of Labor Statistics reports that it performs 60,000 consumer interviews and reviews 28,000 weekly diaries to determine purchasing frequency. According to Iowa State University, a typical weight for a CPI basket is:
- Housing - 40 percent
- Food and beverage - 18 percent
- Recreation - 6 percent
- Education and communication - 5 percent
- Apparel - 4 percent
- Transportation - 18 percent
- Medical care - 6 percent
- Recreation - 6 percent
- Other goods and services - 5 percent
Find Prices and Weighted Costs
Determine the current average price for each market basket category. The Bureau of Labor Statistics employees accomplish this by contacting businesses and checking the prices of 80,000 goods and services in various metropolitan areas. You can read more about how the agency collects and reviews prices here.
Multiply each category price by its market weight to find the weighted cost. For example, if research shows that average housing prices are $6,000 per year and the weight is 40 percent, the weighted price for that category is $2,400. If food and beverage costs are $5,000 a year and the weight is 16 percent, the weighted cost is $800.
Determine the Cost of the Basket of Goods
Sum the weighted prices for each category to find the cost of the current basket of goods. For example, if your basket only contains housing and food and beverage, the cost of the CPI basket would be $5,000 plus $800, or $5,800.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.