Category Proportions
Weights of the goods and services also called relative importance, signify how prominent they are in consumers’ budgets. For example, around 42% of the 2021 CPI basket is devoted to Housing (rent, utilities, furniture, etc.), meaning the category significantly impacts the CPI result.
Due to changes in categories and subcategories, the Truflation category weights differ from the ones in the CPI basket.
The relative importance allows for the calculation of the weighted average.
For example, if the prices of the products in the basket are 3, 10, and 50, and their relative importance is if the relative importance is 11%, 9%, and 32%, respectively, then the weighted average for one time period will be:
0.11x3 + 0.09x10 + 0.32x50
The result is then compared to a weighted average of the same product prices for another period, with new relative importance numbers for that period.
The relative importance of goods in the CPI basket changes yearly. The Truflation Index uses the less popular chained-CPI basket weights, which update monthly based on the current consumer spending habits.
Copy link