Essential Components of CPI Construction

Steps:

• Recall CPI formula uses base-year prices and quantities (weights) to compute weighted average price changes.
• Confirm base year is required for reference comparisons.
• Note weights are needed to proportion items by consumption share.
• Recognize price stability is not required, as CPI measures inflation or deflation over time.

Why C is correct:

• The Laspeyres price index for CPI mandates a base year for ratios and fixed weights from expenditure surveys, but assumes no price stability to track changes effectively.

Why the others are wrong:

• A: Price stability is unnecessary; CPI quantifies instability in prices.
• B: Weights are required to avoid unrepresentative simple averages of prices.
• D: Base year is essential for establishing the reference period in index calculations.

Final answer: C