Consumer Price Index (CPI)

A weighted sum of prices of goods and services that a typical consumer purchases each year.

To illustrate a CPI, let's make up a simple example. Let's call our example the "young professional consumer price index." Suppose that a "typical" young professional spends one third of his available resource on housing, one third on domestically manufactured food, clothing, and supplies, and one third on foreign-manufactured good (i.e. cars, computer). Then by collecting information on the average prices of each of these components of the typical young professional consumer's expenses and by multiplying each one by one third and summing the results, we can calculate the numerical value of the consumer price index for the young professional.