The cost of living in a certain country can be measured using various parameters which among them is inflation, interest rate and changes in prices of certain consumer products. The most used measure of the cost of living is the use of a price index. This is a parameter that measures changes in the relativity of price changes. The price index is organized in a manner that people can reflect on the previous changes in prices over time. Through this data, one is also able to predict the possible in the future and therefore plan in advance.
Through this information, authorities are able to plan in advance and come up with regulations to protect their citizens. Price changes are also able to be compared from one region to another through the price index. In a normal world, price indexes ought to be used when determining changes in the cost of living and as a comparison tool between two regions or countries. During data collection for the information to be used in the price indexes care should be taken remove other factors that could lead to price changes.
There are various price indexes at the disposal of policymakers and economists. These indexes include; producer price index (CPI), consumer price index, and housing price index (HPI). CPI is expressed as an average of prices that urban consumers will have to pay for a basket of commodities (Index, 2014). The housing price index is the average prices of family houses (single) (Wu, Deng & Liu, 2014). The CPI and the HPI affect citizens directly as opposed to producer price index.
this paper, we will be analyzing these two indexes and how they are related and differ to each other. Both indexes have composite values hence there is a possibility that they will differ due to their constituent changes. Price movements can be caused by various factors such as pull by demand and supply and this also affects the trends in these indexes. In some cases, one change in a certain factor could affect prices across the board caused by the multiplier effect.
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