What Is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics (BLS), measures the monthly change in price for a figurative basket of goods and services. These items can change over time.

CPI is a 澳洲幸运5官方开奖结果体彩网:weighted average of prices and is representative of aggregate U.S. consumer spending. It is used as a metric for inflation and deflation.

The CPI report uses a different survey methodology, price samples, and index weights than the 澳洲幸运5官方开奖结果体彩网:producer price index (PPI), which measures changes in the prices paid by U.S. 🔴producers of goodℱs and services.

Understanding the CPI

Data Collection

The BLS collects about 80,000 prices monthly from retail stores, service establishments, rental units, and doctors' offices.

The data compiled and used to track prices covers 93% of the U.S. population. User fees and sales or excise taxes are included in CPI while income taxes and the prices of investments such as stocks, bonds, or life insurance policies are not.

Data Adjustments

The CPI accounts for 澳洲幸运5官方开奖结果体彩网:substitution effects—consumers' tendency to shift spending away from products and product categories that have grown relatively moജre expensive with t♛ime.

It also adjusts price data for changes in product quality and features. The weighting of the product and service categories in the CPI indexes corresponds to recent consumer spending patterns derived from a separate survey.

Shelter category prices are based on a survey of rental prices for 50,000 housing units. They are then used to calculate the rise in rental prices as well as owners' equivalents.

The owners' equivalent category models the rent equivalent for owner-occupied housing to properly reflect housing costs' share of 澳洲幸运5官方开奖结果体彩网:consumer spending.

Types of CPIs

The BLS publishes two CPI indexes each month. The Consumer💫 Price Index for All Urban Consumers (CPI-U) repre༒sents 9🗹3% of the U.S. population not living in remote rural areas.

It doesn't cover spending by people living in farm households, institutions, or on military bases. CPI-U is the basis of the widely reported CPI numbers that matter to financial markets.

The BLS also publishes the Consume♏r Price Index for Urban Wage Earners and Cleric🍎al Workers (CPI-W). The CPI-W covers 29% of the U.S. population living in households with income derived predominantly from clerical employment or jobs with an hourly wage.

CPI-W is used to adjust Social Security payments as well as other federal benefits and pensions f൩or changes in the cost of living.

It also shifts federal income 澳洲幸运5官方开奖结果体彩网:tax brackets to ensure taxpayers aren't subjected to a higher marginal rate as a result of inflation.

CPI-U Formula

The more common CPI-U calculation entails two primary formulas. The first is used to determine the current cost of the weighted average basket of products, while the second is used to analyze the year-over-year (YOY) change.

To calculate the annual CPI, the BLS divides the current value of a spe🗹cific basket of goods compa🎶red to one year ago:

$\begin{aligned}\text{Annual CPI}=\frac{\text{Value of Basket in Current Year}}{\text{Value of Basket in Prior Year}}\times 100\end{aligned}$Annual CPI=Value of&nb💟sp;Basket in Prior YearValue of Basket in Curr🦄ent Year​×100​

The basket of goods and services used in the CPI calculation is a 澳洲幸运5官方开奖结果体彩网:composite of popular it꧟ems commonly purchased by Americans.

The weight of each component of the basket is in proportion to how they are sold. The annual CPI is reported as a whole number, and the figure is of𝓰ten greater than 1🐽00, assuming current market prices are appreciating.

⛄Then, the BLS uses the current year's CPI and the prior year's CPI to calculate the inflation rate.

$\begin{aligned}\text{Inflation Rate} = \frac{\text{New CPI} - \text{Prior CPI}}{\text{Prior CPI}}\times100\end{aligned}$Inflation Rate=Prior CPINew CPI−Prior CPI​×100​

The inflation rate can be calculated for a given month or annual period; in eith🥃er case, the ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚappropriate new and prior period must be selected.

The inflation rate is reported as a percentage and is often positive, indicating current market prices are appreciating.

CPI Categories

The from the BLS leads with the change from the prio✅r month for the overall CPI-U as well as its key subcategories, along with the unadjusted change year-over-year.

The BLS' detailed tables show price changes for a variety of goods and services organized by eight umbrella spending categories.

Subcategories estimate price changes for everything from tomatoes and salad dressing to auto repairs and sporting events tickets. Price changes for each subcategory are provided with and without 澳洲幸运5官方开奖结果体彩网:seasonal adjustment.

BLS also publishes CPI data for U.S. regions, sub-regions, and major metropolitan areas. The metro data is subject to wider fluctuations and is useful mainly to identify price changes based on local conditions.

The table below represents the CPI basket weighted distribution for food, energy, and all other items.

Using the CPI

The CPI is widely used by financi❀al market participants to gauge inflation and by the Federal Reserve to calibrate its mon♚etary policy.

Businesses and consumers also use the CPI to make informed economic decisions. Since CPI measures the change in consumers' 澳洲幸运5官方开奖结果体彩网:purchasing power, it is often a key factor in pay 🧜negotiations. 

• The Federal Reserve: The Fed uses CPI data to determine economic policy. With a 澳洲幸运5官方开奖结果体彩网:target inflation rate of 2%, the Fed may enact expansionary monetary policy to stimulate the economy should market growth slow, or enact contractionary monetary policy should the economy grow too quickly. In response to higher-than-desired inflation rates via the CPI, the Fed adjusts the 澳洲幸运5官方开奖结果体彩网:Fed funds rate.
• COLAs: The 澳洲幸运5官方开奖结果体彩网:cost-of-living adjustments (COLAs) based on the CPI affect federal payments to the approximately 70 million Americans receiving Social Security and 澳洲幸运5官方开奖结果体彩网:Supplemental Security Income (SSI) benefits. They also apply to federal pension payments, school lunch subsidies, and income tax brackets.
• Housing: Mortgage rates and long-term debt are often impacted by rates set by government agencies. As the CPI increases and the government enacts policy changes to slow inflation, rates often increase. Landlords may use CPI information to adequately assess what annual rent increases for renters should be.
• Financial markets: Financial market prices can react to the CPI, as reactionary Fed policies directly impact economic growth, corporate profits, and consumer spending ability. A higher CPI often means that a less stringent government policy is generally in place. Debt is easier to obtain and individuals have greater spending capacity. Lower or decreasing CPI may indicate that the government may ease policies that help boost the economy.
• Labor: The CPI and its components support changes in hourly or weekly earnings. Employees may turn to CPI reports when approaching their employers for a raise based on nationwide increases in labor rates as well as pricing. Some workers covered by 澳洲幸运5官方开奖结果体彩网:collective bargaining agreements may have their 澳洲ꦑ幸运5官方开奖结果体彩网:contracts and 🍎wages tied to changes in CPI.
  

The Bottom Line

The Consumer Price Index measures the average change in prices paid by consumers overܫ tim♈e for a basket of goods and services. The index is calculated and published monthly by the Bureau of Labor Statistics.

It is a common measure of inflation, indicating the health and direction of the economy. It also serves in other capacities, notably to help make adjustments to certain income pa𒁏yments, such as Social Security and pensions for federal civil service retirees.