Understanding the Consumer Price Index (CPI): Meaning and Examples

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The Consumer Price Index (CPI) is Ireland’s official measure of inflation, used to track how the cost of living changes over time. It looks at a basket of everyday goods and services that a typical household buys, and monitors their prices each month. On this page, we define the Consumer Price Index and how it’s calculated, the factors that influence it, and what the CPI means for you.

The Consumer Price Index (CPI) is a measure of inflation, tracking how the prices of everyday goods and services change over time. It represents the average price change for a fixed ‘basket’ of items (sometimes known as a ‘market basket’), which includes over 700 goods and services. 

This ‘basket’ reflects the spending habits of an average household in Ireland. It is updated annually to reflect changing consumer trends. In 2024, for example, air fryers and wireless headphones were added, while digital cameras and landline telephones were removed.

In Ireland and other countries, the CPI index is an important tool for assessing the cost of living and is used by governments when making economic decisions. But it’s not just for policymakers – consumers can also make sure they understand the meaning of CPI so that they can see how inflation affects daily living costs.

The Consumer Price Index in Ireland is calculated by the Central Statistics Office (CSO). Each month, price collectors gather data by visiting over 1,150 shops and businesses around the country, ranging from major high-street retailers to smaller, local stores. Around 53,000 prices are collected and then compared to those from the previous month. The CSO also incorporates online price data and transaction information from major retailers.

The list of products and services tracked by the CSO ranges from everyday items like bread to services such as insurance premiums, train fares, and utility bills like gas and electricity.

Each item in the CPI is assigned a ‘weight’ based on how much Irish households typically spend on it. Given that people are likely to spend more of their income on petrol than bread, petrol carries a greater weight because it represents a larger portion of household expenditure. These weights are updated over time to reflect changing habits – for example, video rental would have played an important role in the 90s, but today, streaming services take a larger share.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

As of December 2024, the Irish Consumer Price Index is 101.4 points, up from 100.5 points in November. This CPI means that the inflation rate is 1.40% compared to the same time last year.

The sector which had the fastest rate of price rises was restaurants and hotels, at 3.7%*. Overall, inflation is still pushing prices up in Ireland, similar to many other countries.

While the CPI also measures price changes from month to month, to fully grasp the meaning of CPI, it’s usually best to look at the full year. This is generally what you’ll see in the news when inflation has changed. This is because month-on-month changes can be driven by seasonal or other temporary factors.

Since December 2023, price increases have stabilised somewhat, with smaller year-on-year differences. This suggests inflation has cooled slightly compared to earlier periods of sharp price hikes:

As you can see, the graph also shows ‘HICP’. The main difference is that the HICP does not include mortgage interest, certain motor tax products or house insurance, whereas the CPI does. The HICP is used to compare inflation rates between members of the European Union.

If you then compare these figures to those of 2022, you can see how the situation has changed. Back then, inflation reached some of its highest levels, especially in December, when year-on-year prices surged by 4.6%.

Having looked at the meaning of CPI, you might be wondering how it’s linked to inflation. CPI and inflation are closely related, but distinct, concepts. Inflation refers to the general rate at which prices rise, and your money loses its purchasing power, meaning it buys less over time, whereas the Consumer Price Index is simply the tool used to measure that inflation. A price index tells us the percentage change in prices over time, and the CPI is the official indicator of inflation in Ireland.

You can think of the CPI as a snapshot of how prices are changing at a specific moment in time, while inflation is the broader economic trend that CPI measures. For example, if the CPI shows a 3% increase in prices over a year, it means inflation is at 3%. This gives you a clear idea of how much your money’s value has decreased (or increased, if in minus figures).

To give an example, if a loaf of bread costs €1 in January 2022, and the CPI shows a 7.8% rise in 2023, the same loaf would cost about €1.08 by the following year. The extra 8 cents represents inflation, showing how your purchasing power shrinks over time. The like-for-like comparison of the CPI ‘market basket’ provides a pure price change that indicates the level of inflation.

CPI doesn’t just measure inflation; it makes inflation measurable. Consumers can use it to track trends, such as whether wages, pensions, or savings are keeping up with price increases. As a real-life example: if inflation as measured by the CPI is at 1.7%, ideally, your savings should grow at the same rate (or higher) to maintain their value. A high-yield savings account can help protect your money from inflation and maintain its purchasing power

When learning about the meaning of the Consumer Price Index, you’ll see how it’s closely connected to interest rates through inflation. When the CPI rises, indicating higher inflation, central banks often increase interest rates to slow down spending and help stabilise prices. On the other hand, if the CPI falls, suggesting deflation, interest rates are usually lowered to encourage borrowing and spending, which helps boost the economy and inflation.

This connection also impacts your savings. If inflation is higher than the interest rate on your savings, the value of your money decreases over time. For example, if you have €200 in a savings account earning 1.00% AER interest, you’d have €202 after one year. But if inflation is 2%, you’d need €204 to maintain the same purchasing power. To protect your savings from inflation, interest rates need to keep pace.

When looking at definitions of the Consumer Price Index, it’s easy to think of it as just reflecting price changes in shops, but its causes are more complex than just supply and demand. While prices rise when demand increases, other factors also influence the CPI.

Supply-side factors, such as changes in oil prices, geopolitical events, or disruptions in supply chains, can cause prices to rise even when demand stays the same. The global energy price surges of 2022 are a prime example. These were triggered by the invasion of Ukraine, which led to a global energy crisis. This disruption caused sharp increases in household bills for gas and electricity, as well as shortages of certain food items, which impacted both supply and demand.

Broader economic factors also play a role. Exchange rates, interest rates, and government policies can influence both supply and demand. Budget decisions, in particular, can either increase or reduce demand within the economy, which then has a knock-on effect on the CPI.

The Consumer Price Index is used across Europe to compare inflation rates between countries. In Ireland, the CPI is typically used to adjust wages, social welfare payments, and pensions to keep up with inflation. It also helps economists and government departments see how well the economy is performing, which, in turn, shapes public policy. That’s why understanding the meaning of CPI is so important.

The CPI data is used by a range of groups, including:

• Irish government departments

• The European Union

• Macroeconomists

• Researchers studying economic trends

• Various special interest groups

Understanding the meaning of CPI can help you see how inflation affects your savings, among other things. While inflation as measured by the CPI has come down in recent months, whenever inflation is in the positive figures, prices are rising. That’s why it’s important to make sure your savings are getting the very best interest rates possible.

Raisin Bank offers some of the most competitive rates on fixed term deposit accounts. And it couldn’t be easier to start saving. Simply register for a free Raisin Account, choose an account and open it, transfer your funds, and watch your savings grow!

*https://www.statista.com/statistics/1346095/ireland-inflation-rate-by-sector/