Consumer Price Index (CPI)

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Consumer Price Index (CPI)

What the CPI is

The Consumer Price Index (CPI) measures how the prices consumers pay for a representative basket of goods and services change over time. Compiled monthly by the U.S. Bureau of Labor Statistics (BLS), the CPI is a widely used gauge of inflation and purchasing-power trends that influences monetary policy, benefit adjustments, contracts, and financial markets.

How the CPI is constructed

  • Data collection: The BLS collects roughly 80,000 price quotes each month from retail stores, service providers, rental units, and medical offices. The CPI dataset covers about 93% of the U.S. population (mainly urban areas).
  • Basket and weights: The index is a weighted average of prices for a composite “basket” of goods and services. Weights reflect recent consumer spending patterns from a separate survey and are updated periodically.
  • Adjustments:
  • Substitution: The CPI accounts for consumers switching to relatively cheaper alternatives.
  • Quality changes: Prices are adjusted for changes in product quality and features.
  • Housing: Shelter costs use rental surveys for about 50,000 units and an “owners’ equivalent rent” (OER) to estimate the cost of owner-occupied housing.

Major CPI variants

  • CPI-U (Consumer Price Index for All Urban Consumers): Represents about 93% of the population and is the standard headline CPI cited by markets and policymakers.
  • CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers): Covers households with income primarily from wages and is used to index Social Security and some federal benefits.
  • Chained CPI (C-CPI-U): A version that accounts for substitution between item categories more frequently, producing a slightly different rate of change.

Headline vs. Core:
– Headline CPI includes all items.
– Core CPI excludes volatile food and energy prices to show underlying inflation trends.

Key formulas

  • Annual CPI (index level):
    Annual CPI = (Value of basket in current year / Value of basket in prior year) × 100
  • Inflation rate (period-to-period percent change):
    Inflation rate = (New CPI − Prior CPI) / Prior CPI × 100

The inflation rate can be calculated for monthly, annual, or any chosen intervals by using the appropriate CPI values.

Categories and geographic detail

The BLS reports changes for the overall CPI and many subcategories (food, energy, shelter, transportation, medical care, education, recreation, etc.). Data are available with and without seasonal adjustment and are published for national, regional, and metropolitan-area levels (metro data can be more volatile).

How the CPI is used

  • Monetary policy: The Federal Reserve monitors CPI and core measures when setting interest-rate policy against its inflation target (commonly 2% over the longer run).
  • Cost-of-living adjustments (COLAs): Social Security, Supplemental Security Income, some federal pensions, and other programs use CPI-based adjustments to preserve purchasing power.
  • Wage negotiations and contracts: Employers, unions, and contract parties reference CPI movements for raises and escalators.
  • Financial markets: Inflation readings influence expectations for interest rates, corporate profits, and asset prices.
  • Consumer and business planning: CPI helps households and firms assess trends in living costs and pricing.

Fast fact: The BLS releases CPI data monthly (typically at 8:30 a.m. Eastern time).

Limitations and criticisms

  • Population coverage: CPI-U focuses on urban consumers and excludes farm households, institutional populations, and military bases; it may not reflect rural experiences.
  • Representativeness: Different demographic groups face different price patterns (e.g., younger households pay more for education, older households for healthcare), so a single aggregate index may not match individual experiences.
  • Measurement choices: Decisions about weighting, substitution rules, and quality adjustments affect the reported inflation rate and are sometimes debated.
  • Shelter measurement: Using owners’ equivalent rent to represent owner-occupied housing costs is conceptually different from mortgage or house-price changes and can be a source of controversy.

Bottom line

The CPI is the principal official measure of consumer price change in the United States. It informs monetary policy, benefit and contract adjustments, and economic decision-making. While indispensable for tracking inflation, the CPI is an aggregate measure with methodological choices and coverage limits that can cause its relevance to vary across households and regions.