Consumer Price Index
Contents
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services. It's one of the most widely used indicators of inflation. The CPI is produced monthly by the U.S. Bureau of Labor Statistics (BLS).
What the CPI Measures
The CPI reflects inflation as it's experienced by consumers in their day-to-day living expenses. The "market basket" of goods and services is based on what families and individuals actually buy. It's a broad measure that includes a wide range of categories:
| • | Food and Beverages: Groceries and restaurant meals. |
| • | Housing: Rent, homeowners' costs, and utilities. |
| • | Apparel: Clothing and footwear. |
| • | Transportation: New and used vehicles, gasoline, and public transit. |
| • | Medical Care: Doctor visits, prescription drugs, and hospital services. |
| • | Recreation, Education, and Communication: Televisions, books, tuition, and phone services. |
The CPI does not include things like income or Social Security taxes, as these are not directly tied to the price of a specific good or service. It also doesn't include investment items like stocks, bonds, or real estate, as these are related to savings rather than consumption.
How the CPI is Calculated
The BLS collects prices from thousands of retail stores, service establishments, and rental units across the country. These prices are then weighted based on their importance in the average consumer's spending habits. The index is set to equal 100 in a specific base period (currently 1982-84), so any index value above 100 indicates how much prices have increased since that time.
For example, if the CPI is 120, it means that prices have increased by 20% since the 1982-84 base period. The most common figures reported from the CPI are the monthly change and the 12-month percentage change, which is the annual inflation rate.
Why the CPI is Important
The CPI is a vital economic tool used by policymakers, businesses, and individuals.
| • | Economic Policy: The Federal Reserve uses the CPI, among other indicators, to guide its monetary policy decisions on interest rates. |
| • | Cost-of-Living Adjustments (COLAs): Social Security benefits, federal pensions, and many private-sector wage and salary increases are adjusted annually based on changes in the CPI to help maintain purchasing power. |
| • | Forecasting and Analysis: Businesses use CPI data to make pricing decisions, while economists and researchers use it to analyze and forecast economic trends. |