Consumer Price Index (CPI)
What it is:
How it works/Example:
The consumer pricemarket basket. The goods and services fall into eight major categories: food and beverage, housing, apparel, transportation, medical care, recreation, education and communication, and other. The BLS updates the market basket every few years to remove obsolete items.
To get the data, BLS economic assistants or visit approximately 23,000 stores and contact approximately 50,000 landlords or tenants in 87 urban areas every month to get prices on the items in the market basket. Commodity specialists review the information and make adjustments for changes in size or quality of the product.
The BLS then compares the cost of the market basket to the same basket in the starting year (usually 1982-1984). To do this, the BLS sets the average price of the market basket during the years 1982, 1983, and 1984 to equal 100. Then in every subsequent period, the BLS calculates price changes in relation to that number. A resulting CPI of 120, for example, means that prices are 20% higher than they were in the base period. By comparing the difference in CPI in consecutive months or years, we can calculate the percentage increase in prices, giving us the inflation rate.
Why it matters:
The CPI is perhaps the best way we have to gauge the amount of inflation in the economy. The affect of inflation directly or indirectly affects nearly every financial decision, from consumer choices to lending rates, from asset allocation to stock prices. By accurately measuring the amount of inflation, people, business, and the government are better able to make future financial decisions. For more information about the Bureau of Labor Statistics inflation measures, visit www.bls.gov/cpi.