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CPI logic for dummies in
How to avoid common pitfalls?
In many countries, wages are adjusted annually to reflect changes in the cost of living. This mechanism, often called salary indexation, aims to protect workers from the eroding effects of inflation. A key component of this system is the Consumer Price Index (CPI), a measure of how the average price of a basket of goods and services purchased by households changes over time. The CPI acts as a barometer, signaling when wages need to be increased to maintain purchasing power. While increases are common in inflationary times, the political will to decrease wages during periods of deflation is often far weaker, creating an interesting asymmetry in the system. This post will explore the details of CPI calculation and highlight some common pitfalls to avoid.
Consider this example: a spreadsheet designed to track the consumer price index over several years. It includes columns for the effective date, year, a preceding value, and a new value.
The index calculation in this spreadsheet involves dividing the ‘new value’ by the ‘start value,’ a method that can be implemented using a function like Quotient. However, this approach, while seemingly straightforward, is problematic for spreadsheet management. It necessitates duplicating values, the new value of the preceding year equals the start value of the…
