Understanding the Consumer Price Index

If you’ve ever watched a news show or read a financial article, you may have come across the phrase consumer price index, or CPI. We’ll explain what it is and why it matters to you and your money.

What is the Consumer Price Index or CPI?

According to the U.S. Bureau of Statistics (BLS), the Consumer Price Index (CPI) is:

• A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Okay, great. What does that actually mean? The CPI can be complicated, so here are some answers to questions about the formula.

How is the CPI Calculated?

The CPI is compiled by the BLS, which gathers about 80,000 price quotes each month from about 23,000 retail and service companies. The categories the prices are picked from include the following:

• Housing (rent of primary residence, utilities, home furnishings)
• Commodities (tangible goods like clothing, furniture, and personal care items)
• Food (groceries, restaurant meals)
• Household Energy (natural gas, fuel oil)
• Health Care (doctor’s visits, prescription drugs, glasses)
• Transportation (new vehicles, insurance, public transportation fares)
• Education and Communication (college tuition, cell phone, and internet service)
• Other Expenses (personal care, bank fees, tobacco products)

Is CPI the Same as Inflation?

CPI is not the same as inflation. In fact, the CPI measures inflation. The CPI is an economic indicator most commonly used by policymakers to identify periods of inflation. The Fed uses the CPI to determine whether it needs to make changes to monetary policy to prevent inflation.

• Consumer Price Index (CPI) tracks the average change over time in prices paid by consumers for a basket of goods and services. In short, it measures price levels.
• Inflation is the percentage change in CPI over time. The short answer is that inflation measures how fast prices are rising.

How Does CPI Impact Me?

The CPI can impact you in a few ways:

1. Cost of Living. If CPI rises, it may indicate that the overall cost of everyday products is rising, including groceries, rent, utilities, etc.
2. Borrowing Costs. If the CPI goes up and agencies make changes to prevent inflation, mortgage rates could increase. CPI indirectly affects the cost to borrow money.
3. Wages. Some employers use the CPI numbers to determine cost of living adjustments. So if CPI increases significantly and wages do not, employees are, in effect, getting a pay cut.

Do One Thing: A higher CPI may indicate inflation, which means prices go up and reduce your spending power. Keep an eye on it to see how the economy is trending.