CPI adjustments represent alterations made to the consumer price index, which is the primary calculation for tracking inflation in an economy. These adjustments are necessary in order to present the best computation possible for measuring inflation. A few common adjustments include creating a basket of goods, weighting each item or class of goods in the basket, and computing an adjustment to determine real growth. Economists usually make the adjustments prior to and during the inflation calculation. CPI adjustments may be necessary after computing the standard CPI measurement in order to glean more data from the presented formula.
A basket of goods represents all the items an individual purchases in order to maintain a certain standard of living. Each item has a specific purpose for inclusion, such as housing, food, transportation, clothes, and other items. As an economy grows and changes, items may be added or taken away from the basket. The purpose here is to track the inflation for each item a consumer purchases over time. For example, technological changes means CPI adjustments may need to include some items from the technology sector in order to track inflation for the individual goods most needed by consumers.
As the basket of goods in the inflation formula is set, economists know that each item does not carry the same weight. Therefore, adding specific weights for CPI adjustments reflects the inflation for those most important items. For example, weighting the change in home prices more than the change in price for clothes may be common in the CPI formula. These adjustments are typically at the behest of the economist or other group tracking inflation. Maintaining these standard weights over time is necessary to ensure that all items have the proper weights, leading to the best information when tracking inflation.
A final set of CPI adjustments is the alteration of the overall formula to determine if there is any real growth in the economy. Inflation erodes an economy’s growth as the increase in prices means that consumers must pay more money for the same number of goods. To do this, economists divide the CPI measurement or index by a monetary time series, which deflates the series and adjusts information to constant dollars. Once complete, economists can track any real growth. Other CPI adjustments may be necessary to complete this part of the formula.
