Question

The economy of a community is based only on the production and sale of carrots and tomatoes. The table below gives the actual prices and quantities sold of each good across a 3 year period. Economists assume that the typical consumer purchases 825 carrots and 550 tomatoes per year. Assuming 2018 is the base year, calculate 2020 inflation based on CPI.

Year	Price of Carrots	Quantity of Carrots	Price of Tomatoes	Quantity of Tomatoes
2018	$1.90	800	$2.60	530
2019	$2.10	820	$2.53	580
2020	$2.26	830	$2.72	570

Answer 1

Cost of basket of goods in 2018 = (1.90 * 825) + (2.60 * 550) = 1,567.5 + 1,430 = $2,997.5

Cost of basket of goods in 2019 = (2.10 * 825) + (2.53 * 550) = 1,732.5 + 1,391.5 = $3,124

Cost of basket of goods in 2020 = (2.26 * 825) + (2.72 * 550) = 1,864.5 + 1,496 = $3,360.5

CPI = (Cost of basket of goods in current year / Cost of basket of goods in base year) * 100

So,

CPI in 2018 = ($2,997.5 / $2,997.5) * 100 = 100

CPI in 2019 = ($3,124 / $2,997.5) * 100 = 104.22

CPI in 2020 = ($3,360.5 / $2,997.5) * 100 = 112.11

Inflation rate in 2020 = [(112.11 - 104.22) / 104.22] * 100 = 7.57%