The base period for the CPI changed in 1998. Under the previous weight and item structure, the CPI for 1995 was 456.5. If the average annual inflation rate was 5.57%, what year was used as the base period for the CPI?

Problem requires the following discussion. The Consumer Price Index (CPI) indicates the relative change in price over time for a fixed basket of goods and services. It is a cost of living index that helps measure the effect of inflation on the cost of goods and services. The CPI uses the base period 1982€“1984 for comparison (the CPI for this period is 100). The CPI for January 2006 was 198.3. This means that $100 in the period 1982€“1984 had the same purchasing power as $198.30 in January 2006. In general, if the rate of inflation averages r per annum over n years, then the CPI index after n years is

 

where CPI₀ is the CPI index at the beginning of the n-year period.

CPI = CPI( 1 + 100,