How is the consumer price index calculated
Consumer price index - calculation of inflation and capital preservation
The consumer price index shows the general price increase and thus the inflation rate. The calculation by the Federal Statistical Office in Wiesbaden is based on a defined shopping basket.
The consumer price index serves as the basis for calculating the inflation rate. This makes it one of the central economic data for economic and monetary policy. It is also the guideline for a number of contracts in which the calculation of pecuniary claims is based on data from the consumer price index. Every 5 years, however, a new basis is used for the calculation.
Calculation of the consumer price index
The consumer price index is collected every month by the Federal Statistical Office in Wiesbaden. The comparison with a base year is used as the basis of assessment for the average price change for all goods and services. The rate of change compared to the previous year is used as a measure of inflation.
The consumer price index is calculated using a consumption scheme, the so-called shopping cart. It contains all goods and services that correspond to the typical consumption habits of an average German household.
This includes food, clothing or rentals, durable consumer goods such as motor vehicles or furniture, as well as services such as hairdressers, insurance or craftsmen's services. Other typical variables are energy, telecommunications, but also government fees and taxes.
Consumer price index - calculation with 300,000 individual prices
Prices are determined in a number of wholesale, retail and service outlets. The Federal Statistical Office and the State Statistical Offices collect around 300,000 individual prices for around 700 goods and services every month in 188 German reporting communities. Since it is about the end consumer, these are gross prices.
Based on this data, the consumer price index is then calculated according to a specific weighting scheme. Among other things, price reductions that result from the fact that newer devices offer more performance at the same price compared to previous models are taken into account.
All these prices are then expressed as a price basis in the form of an index number for a base year. This reference value is 100. The higher index values for the coming years then show the price development and thus the inflation in comparison. If the values fall, there is deflation.
The value of a base year is only valid for 5 years. Since consumer habits change as well as the range of goods and services, the shopping basket is recomposed on a regular basis. The current reference base with a value of 100 is the 2010 basket of goods.
However, the indication of index values or index points is not a percentage. But that is not an obstacle to calculating a change as a percentage. The conversion is simple and takes place according to the formula: (New index level / old index level * 100) - 100. This then gives the respective value in percent. If, for example, August 2013 shows an index level of 106.1 and August 2012 a value of 104.5, the calculation shows that the change from the previous year is 1.5%.
Consumer price index - calculation of value retention clauses
The consumer price index is also used to calculate when it comes to keeping current monetary claims in contracts such as rents, leases or pensions stable. If these capital preservation clauses are permissible, they are linked to the development of the price index. On the one hand, switching to a new base year can cause problems with the calculation.
The reform at the beginning of 2003 also represents a challenge for old contracts. At that time, the various price indices for different household types were replaced by the uniform “consumer price index for Germany”.
Since then, the Federal Statistical Office has not provided any conversion factors for earlier base years. For this, however, it offers extensive assistance for the adjustment of value retention clauses.
An interactive program is available on the Federal Office's website that provides instructions for the independent calculation of benefit adjustments for value protection clauses
Consumer price index - current calculation of historical amounts of money
The consumer price index is also the basis for calculating current comparative values for historical amounts of money. There is also a calculation aid for this on the Internet. The purchase equivalents calculated according to this are indications of the current value of goods and services that were available for a certain amount of money at that time.
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