What is the Consumer Price Index?

What is the Consumer Price Index, or CPI? Officially, the Bureau of Labor Statistics of the United States Department of Labor defines it as: "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 Consumer Price Index (CPI) is different than inflation. The CPI is as its name implies, an index or number that measures change in prices over time. Comparing two Consumer Price Indexes over two different time frames provides a percentage increase, tagged as inflation, or a percentage decrease, tagged as deflation. Thus, CPI readings are used to calculate the current US inflation rate. Most often used as a reference point is the inflation rate over a 12-month period, say comparing the CPI from April 2012 to April 2013. The latest 12-month inflation rate is always shown in the upper box to the right of pages on USInflation.org. The Consumer Price Index is always listed directly below the inflation rate in that same box, represented as a three significant digits with three decimal places.

For the United States, the above Bureau of Labor Statistics definition is perhaps the most fitting because it is the body responsible for accumulating the data used to determine the CPI in the country. Still, the definition really does not adequately describe either the process or the importance of the Consumer Price Index.

So, to begin with, we will look at the process of getting the CPI. To do this, the Bureau samples prices paid by consumers for specific products each month in two population groups. The first group is the all urban consumers group (CPI-U), which excludes those in rural areas, but still represents approximately 87% of the population.

The second group is actually a subset of the first group known as the urban wage earners and clerical workers (CPI-W). This subset basically consists of those members of the CPI-U who earn an hourly wage or work in clerical positions. It does not, however, include the self-employed, retired workers, professional workers, part-time workers or the unemployed.

Two hundred different categories of purchases made by these two groups are then sampled each month. By using so many different categories, significant fluctuations in a single one (say the cost of fuel) can be tempered by the other categories. For the sake of simplification, the categories are combined into eight major groups including:

  • food and beverages;
  • housing;
  • apparel;
  • transportation;
  • medical care;
  • recreation;
  • education and communication; and
  • other goods and services.

The average of the purchase prices in all of the groups are then compared to the average in previous samplings. Thus, fluctuations can be monitored on a monthly basis to determine short and long-term changes in the economy.

But why should the average consumer care about the CPI? For one thing, it is used as a measure of determining inflation in the country. While most economists consider a small amount of inflation good for the economy, rampant inflation is generally considered bad as your purchasing power significantly declines.

Also, some individuals can directly be affected by the CPI. By looking at the Consumer Price Index for the last year, cost-of-living adjustments are sometimes made to wages, pensions, benefits, etc.

Here is a table of the CPI data from 1913 to current as published by the US government. These figures are used to calculate inflation rates over various tables.

The official area at the Bureau of Labor Statistics about the Consumer Price Index is located at http://www.bls.gov/cpi/.

Consumer Prices, Inflation Reports & Calculators