What Is the Consumer Price Index (CPI)? Calculation, Importance, and Economic Impacts

What is the Consumer Price Index (CPI) and how is it calculated? Explore its role in measuring inflation, its economic significance, and how CPI figures are interpreted.

Published by Zeynep ÖZTÜRK

22 July 2025, 12:14 published Updated 22 July 2025, 12:14

What Is the Consumer Price Index (CPI)?

Understanding the pulse of the economy is crucial for both individuals and investors. One of the most reliable tools for gauging inflation and price movements is the Consumer Price Index (CPI). Published monthly by the Turkish Statistical Institute (TÜİK), CPI is a frequently cited economic indicator, though its inner workings often remain unfamiliar to the general public. In this article, we’ll explore what CPI is, how it’s calculated, why it matters, and how it correlates with inflation.

What Is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the average change over time in the prices of a fixed basket of goods and services purchased by consumers. It is one of the most widely used indicators for tracking inflation.

In simple terms:

CPI reflects the price changes of a consumer basket over time.
This basket includes categories such as food, clothing, transportation, healthcare, housing, and recreation.
An increase in CPI signifies a decrease in the purchasing power of money.

How Is CPI Calculated?

CPI is calculated by comparing the current cost of a consumer basket to the cost in a base year. The basic steps involved are as follows:

Defining the Consumer Basket:
TÜİK identifies a representative basket of goods and services commonly purchased by households.
Price Collection:
Prices for items in the basket are collected periodically across different regions of Turkey.
Weight Assignment:
Each item group is assigned a weight based on its relative share in household expenditures. For example, food typically carries more weight than education in household budgets.
Index Calculation:
The total cost of the basket is calculated monthly, and compared against the base year to determine percentage changes.

Relationship Between CPI and Inflation

CPI is a primary tool for measuring inflation. The annual change in CPI is typically cited as the official inflation rate. For example:

If CPI increases by 20%, it is interpreted as a 20% annual inflation rate.
However, CPI reflects price changes only from the consumer’s perspective, not the entire economy.

It’s worth noting that other indicators like the Producer Price Index (PPI) and the Domestic Producer Price Index (D-PPI) also provide insights into inflation from different angles.

How CPI Affects the Economy

CPI is not just a number; it has wide-ranging impacts on economic decisions and policies. Its primary effects include:

1. Central Bank Policy Decisions

The Central Bank of the Republic of Turkey (CBRT) relies on CPI data to shape its monetary policies. Decisions to raise or lower interest rates are often based on CPI trends.

2. Wage and Pension Adjustments

Minimum wages, pensions, and public employee salaries are frequently adjusted based on the annual CPI.

3. Tax and Rent Regulations

Legal adjustments such as rent increases and tax thresholds often use CPI as a benchmark.

4. Investor Confidence

A rising CPI may signal economic instability to investors, while a stable CPI fosters confidence and investment.

Factors Influencing CPI

Several factors may cause CPI to rise or fall. Some of the most influential include:

Exchange rate fluctuations
Energy prices (especially oil and natural gas)
Agricultural supply shortages
Increases in taxes or import duties
Changes in consumer demand

In developing economies like Turkey, exchange rate pass-through and energy dependency are major factors that drive CPI volatility.

Historical CPI Trends in Turkey

Turkey has experienced high inflation periods where CPI rose to double-digit levels. While inflation was brought under control in the early 2000s through economic reforms, recent years have seen a resurgence due to:

The 2018 currency crisis
Post-2021 expansionary monetary policies
Global increases in food and energy prices

These developments have placed upward pressure on CPI and inflation rates overall.

Where to Access CPI Data

TÜİK publishes updated CPI data on the 3rd day of each month. These reports include:

Monthly change rates
Annual change rates
12-month moving averages
Category-based breakdowns

You can access the official data through the TÜİK website.

Frequently Asked Questions (FAQ)

What happens when CPI is high?

A high CPI indicates increased inflation and reduced purchasing power, often leading to higher living costs.

What is the difference between CPI and PPI?

CPI tracks consumer-level price changes, while PPI measures changes in prices received by domestic producers.

What does a decline in CPI mean?

Falling CPI suggests a slowdown in price growth, but it may also signal deflation, which can be harmful to the economy.

Conclusion

The Consumer Price Index (CPI) is a vital tool for monitoring inflation and understanding the economic environment. Whether you are managing a household budget or making investment decisions, tracking CPI data can offer valuable insights. By recognizing how CPI works and how it influences everyday life, individuals and policymakers alike can make more informed economic choices.