Basket of Goods

Key Takeaways
* A basket of goods is a representative collection of consumer items and services used to track price changes and measure inflation.
* The U.S. Bureau of Labor Statistics (BLS) samples roughly 80,000 prices monthly across more than 200 categories to produce the Consumer Price Index (CPI).
* CPI calculations adjust for product quality improvements, account for consumer substitution, and weight items based on consumer spending patterns.
* CPI variants include CPI‑U (covers ~90% of the population) and CPI‑W (covers ~30% and is used for Social Security adjustments).

What is a basket of goods?

A basket of goods is a fixed, representative set of products and services whose prices are tracked over time to measure changes in the cost of living. By monitoring how much consumers pay for items in the basket, economists and policymakers estimate inflation and make decisions about monetary and fiscal policy.

How the basket is constructed and sampled

The BLS constructs a broad basket that spans major spending categories—food, energy, apparel, housing, transportation, healthcare, and services—broken into hundreds of subcategories. Key features of the U.S. sampling approach:
* About 80,000 prices are collected monthly across more than 200 item categories.
* Prices are gathered from roughly 23,000 retail and service outlets in 75 urban areas; rent data come from about 50,000 landlords or tenants.
* Items for each outlet are selected randomly with probabilities proportional to spending importance (brand, variety, size).
* Sampled items typically remain in the sample for four years.

How the CPI is calculated

1. Price collection: Field agents and administrative data sources record prices for the items in the basket.
2. Quality adjustment: Specialists adjust prices to remove changes that reflect product improvements (e.g., new features on electronics or autos) so the index measures pure price change.
3. Index construction: Basic indexes are calculated for dozens of item categories across geographic areas, producing thousands of item‑area combinations.
4. Substitution and weighting: Indexes incorporate consumer substitution (shifting toward cheaper alternatives) and are weighted using recent consumer expenditure data to reflect spending patterns.
5. Aggregation into CPI series: Weighted item indexes are combined to create headline CPI series such as:
6. CPI‑U (All Urban Consumers) — represents about 90% of the U.S. population and is the common headline inflation measure.
7. CPI‑W (Urban Wage Earners and Clerical Workers) — covers roughly 30% of households and is used for Social Security and some tax adjustments.

CPI and broader measures of inflation

CPI measures inflation from the consumer perspective. Other important measures include:
* Producer Price Index (PPI) — tracks price changes received by producers.
* Employment Cost Index — measures inflation in labor costs.
* GDP price deflator — covers price changes for all domestically produced goods and services (includes exports, excludes imports).

Policymakers, including the Federal Reserve, use CPI and related measures to guide decisions. The Fed’s long‑run inflation aim is 2% annually.

Special data sources and alternative collection methods

For some items the BLS uses alternative data sources instead of in‑store collection:
* Airline fares — Department of Transportation databases.
* Apparel and household goods — large vendor data feeds rather than in‑store sampling.
* Postage — USPS Household Diary Survey plus public USPS prices.
* Prescription drugs — vendor price data feeds.
* Used cars and trucks — J.D. Power Information Network plus a sampled vehicle panel.
* Gasoline — secondary datasets used since mid‑2021.
* New vehicles — transaction data (e.g., J.D. Power) used since 2022.

Recent methodological updates

• Owners’ equivalent rent (OER) weighting was refined to incorporate neighborhood housing-structure information to better reflect local housing costs.
• CPI weight updates moved to an annual schedule using a single calendar year of consumer expenditure data beginning with 2023 data (previously updated biennially).
• New‑vehicle indices shifted to transaction‑level price data to reduce biases from price discrimination and product cycles.

Common questions

What items are typically included?
* Essentials such as food, housing (rent/utilities), transportation (fuel, vehicle purchases), healthcare, apparel, and personal services.

How often is the basket updated?
* The item composition and weights are reviewed periodically. Recent practice moved CPI weighting to annual updates; individual item samples are rotated on a multiyear basis.

Why is the basket important?
* It provides a standardized way to measure the cost of living and inflation, informing wage adjustments, benefit indexing, and monetary policy.

Bottom line

A basket of goods is the foundation of consumer price statistics. Through detailed price collection, quality adjustments, substitution treatment, and expenditure weighting, the CPI translates price movements into a measure of inflation that helps households, businesses, and policymakers understand changes in the cost of living.

Sources
* U.S. Bureau of Labor Statistics — Consumer Price Index methodology and data
* Bureau of Economic Analysis — GDP price deflator
* Federal Reserve — inflation objectives and policy context