The Consumer Price Index: How It's Used and What It Means

April 12, 2023, 3:30 p.m. Business

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is used to measure inflation and is often used as an economic indicator.

The CPI is calculated by the U.S. Bureau of Labor Statistics (BLS) and is released monthly. The CPI can be used to measure the change in prices for a specific basket of goods and services, or for the economy as a whole.

The CPI is often used as a measure of inflation. Inflation is defined as the rate at which the prices of a basket of goods and services increase over time. The CPI is used to measure the cost of living and is often used to adjust Social Security benefits and income taxes.

The CPI is also used to index the prices of some government benefits and contracts. For example, the CPI is used to adjust the interest rates on Treasury Inflation-Protected Securities (TIPS).

The CPI is not a perfect measure of inflation, but it is the most widely used measure of inflation in the United States. The CPI does not include the prices of investment goods, such as stocks and bonds, and it does not include the prices of imported goods.

The CPI is calculated using a "market basket" of goods and services. The market basket is a collection of items that are representative of the purchases made by urban consumers. The CPI market basket includes items such as food, housing, clothing, transportation, medical care, and recreation.

The CPI is calculated using a "weighted average" of the prices of the items in the market basket. The weights are based on the relative importance of the items in the market basket. The CPI is calculated using data from the BLS Consumer Expenditure Survey.

The CPI is a "lagging" economic indicator. This means that the CPI does not always reflect the most recent changes in prices. The CPI is released monthly, but the data used to calculate the CPI are collected over a period of time.

The CPI is not the only measure of inflation. Other measures of inflation include the Personal Consumption Expenditures (PCE) deflator and the Producer Price Index (PPI).