The people of Fort Worth buy only juice and cloth. The CPI market basket contains the quantities bought in 2009. The average household spent $60.00 on juice and $30.00 on cloth in 2009 when the price of juice was $2.00 a bottle and the price of cloth was $5.00 a yard. In the current year, 2010, juice is $4.00 a bottle and cloth is $6.00 a yard. Calculate the CPI and inflation rate in 2010.

CPI = (4+6) / (2+5) = 1.43

INFLATION RATE = 1.43 / (2+5) = 0.2 x 100 = 20%

Explanation:

The people of Fort Worth buy only juice and cloth. The CPI market basket contains the quantities bought in 2009.

The average household spent

ITEM  OLD PRICE   NEW PRICE

JUICE   $2.00                $4

CLOTH $5.00                $6

CPI = NEW PRICE / OLD PRICE

CPI = (4+6) / (2+5) = 1.43

INFLATION RATE = CHANGE IN PRICE (CPI) / OLD PRICE  x 100

INFLATION RATE = 1.43 / (2+5) = 0.2 x 100 = 20%

CPI 2010 = 1.73

inflation rate = 73.33%

Explanation:

CPI 2009

juice           30 units x $2 per unit = $60  

cloth           6 units x $5 per unit = $30

total                                                 $90

CPI 2010

juice           30 units x $4 per unit = $120  

cloth           6 units x $6 per unit = $36

total                                                  $156

CPI 2010 = $156 / $90 = 1.73

inflation rate = [($156 - $90) / $90] x 100 = 73.33%

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