Measuring Inflation: CPI
Price index: the current value of a bundle of goods and services expressed as a percentage of its value in the base year.
Consumer Price Index-a measurement of the average level of prices of the goods and services a typical family consumes in Canada. It does not take the substitution of goods into consideration. it includes imported goods and services and only includes goods and services purchased by Consumption spending.
CPI= Cost of market basket in current year/ cost of market basket in base year* 100
2 pizzas and 2 cal zones (basket of goods)- 2*12+2*6=36/2*10+2*5=30*100 shows there was a 20% increase in inflation since the base year

Difference between GDP deflator and CPI
GDP Deflator
CPI
includes goods and services purchased by government and business
Only includes consumption spending not government and business spending
different goods from year to year
Same goods

not updated every year

ignores substitution, consumers switch to cheaper alternatives
does not include import spending
includes imports

Inflation rate= change in price index/ price index for previous year*1009new - old/old*100)

Dec 2010
Dec 2011
Canada
120.2
117.5
Alberta
126.5
122.9
inflation in Canada= 120.2-117.5/117.5*100= 2.3%
inflation in Alberta= 126.5-122.9/122.9*100=2.35%

Dr. Stephanie Powers, "Economic Growth".(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)