What is the Consumer Price Index?
The consumer price index (CPI) measures changes in consumer prices. The Bureau of Labor Statistics (BLS) calculates and publishes CPI data monthly. The CPI is the most recognized inflation measure in the U.S.
How the Consumer Price Index Works
The consumer price index measures the monthly change in the retail prices of approximately 80,000 specific goods and services, called the market 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 call or visit approximately 23,000 stores and contact approximately 43,000 landlords or tenants in 75 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 the Consumer Price Index Matters
The CPI is perhaps the best way we have to gauge the amount of inflation in the economy. 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.