How do you use the consumer price index?

1 What is the CPI?

The CPI is calculated by collecting and comparing the prices of a representative sample of goods and services that consumers typically buy, such as food, clothing, housing, transportation, health care, and entertainment. The CPI reflects the changes in the cost of living for different groups of consumers, such as urban or rural, or by region, income, or age. The CPI is usually expressed as an index number, which means it shows the percentage change in prices relative to a base year.

2 How to read the CPI?

The CPI is published monthly by the Bureau of Labor Statistics (BLS) in the United States, as well as by similar agencies in other countries. You can access the latest CPI data and historical trends from the BLS website or other online sources. To read the CPI, it is important to understand some key concepts, such as the base year. The BLS uses 1982-1984 as the base period and assigns it an index value of 100, meaning that if the CPI for all items in a given month is 260, it means that the average prices of the basket of goods and services have increased by 160% since the base period. Additionally, there is a market basket which is a collection of goods and services that represents consumer preferences and availability of new products. This market basket is divided into eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. Lastly, there are weights which are the relative importance or share of each group and subcategory in the market basket. These weights are based on average expenditure of consumers on each item which determine how much each item affects the overall CPI - for example housing has the largest weight in the CPI accounting for about 42% of the total.

3 How to use the CPI?

The CPI can be used for various purposes, such as measuring inflation, adjusting for inflation, and indexing contracts and policies. To measure inflation, you can compare the CPI in different periods, such as year-to-year or month-to-month. For example, if the CPI for all items was 260 in January 2020 and 270 in January 2021, it means that the inflation rate for the year was about 3.8%. Adjusting for inflation is useful for comparing the economic performance or affordability of different periods, groups, or regions. Additionally, the CPI can be used to link payments or benefits to changes in prices to maintain their real value over time. This is common for social security, pensions, tax brackets, wages, rents, or loans.

5 How to find alternative measures of inflation and purchasing power?

The CPI is not the only measure of inflation and purchasing power available. Other indicators may be used to complement or supplement the CPI, depending on the purpose and context of the analysis. For example, the personal consumption expenditures (PCE) price index is based on the expenditures of consumers on goods and services, derived from the national income and product accounts. This differs from the CPI in terms of coverage, weights, and methodology. The Federal Reserve often uses the PCE price index as a target for monetary policy. Additionally, the producer price index (PPI) reflects changes in production costs and margins that may affect consumer prices. This covers various stages and sectors of production, such as commodities, intermediate goods, and final goods. Lastly, the GDP deflator is based on the ratio of nominal GDP to real GDP which measures economic growth and output. This also differs from the CPI in terms of coverage, weights, and methodology.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?