Consumer Price Index Calculations

snipped-for-privacy@gmail.com (Zigball) posted:

It appears your ground rental cost is indexed to the CPI of

2001 (presumably the year the lease started). That would mean the calculation in question would be stated as follows: $50,000 = base cost as of 2001, when CPI5

Current CPI is 216, which is 31 higher than 185

31 divided by base of 185 = 16.75675 % 16.75675 X $50,000 = $8,378.38 [Note: slight difference in pennies probably from rounding.]

Ergo, the CPI increase was about 16.76%, and that was the amount of increase for your ground rental. So, for example, if the next year's CPI report for the relevant period shows 230, you could calculate your ground rental as follows:

230 - 185 = 45 45/185 = 24.32% 2432 X $50,000 = $12,162 $50,000 + $12,162 = $62,162

Bill

Your formula is more correctly shown as: ($50,000 / 185) * 216 = $8,378.32

The 2001 CPI was probably a "given" of your homework problem.

Another way to look at this is to say that the CPI increased

31 points between 2001 and the current CPI, or approximately 15%. So, to make the ground rent neutral, in current purchaseing value, the rent must increase by the same percentage. Do the math, it comes out the same. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

What they are doing is figuring out the increase from 2001 to now. They are saying that $58,378 in current dollars is the same as $50,000 in 2001 dollars. The dollars have depreciated but you are required to pay the same value rather than the same amount of dollars. First they take the $50,000 and essentially back out the

2001 CPI by dividing by it. Then they add back the current CPI by multiplying that figure. Their calculation, as you have described it, is correct.

Stu

This link explains the CPI for rentals and includes a discussion of use of the year 2001:

Here is a FAQ page which should answer any other questions you may have on the CPI:

Got it thanks alot!