Consumer Price Index (CPI)

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services. It is the most commonly reported measure of the consumer price levels.

The Consumer Price Index (CPI) is based on a fixed basket of goods and services that are representative of what a typical consumer or a household purchases each month.

The consumer price index is a measure which is used to track the change in prices for common household goods over time. Researchers determine the cost of a particular set of goods and services every year, and then this cost is compared against the cost of goods and services from other years.

Consumer Price Index (CPI) and inflation

Increases in the CPI level are watched as a measure of the consumer inflation rate.

The rate of inflation over a period of time is simply the percentage increase in the CPI over the period.

Inflation is often reported on an annualized basis.

Different flavors of Consumer Price Index (CPI)

The U.S. Bureau of Labor Statistics measures two types of CPI statistics:

  • CPI for urban wage earners and clerical workers (CPI-W),
  • chained CPI for all urban consumers (C-CPI-U)

The C-CPI-U is a better representation of the general public price level because it includes about 87% of the population.

How is the Consumer Price Index (CPI) calculated?

The Consumer Price Index (CPI) is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

The weights of goods and services are assigned according to their importance in the consumption of households.

Changes in CPI are used to assess price changes associated with the cost of living.

To determine the percentage change in prices between two years, simply use the following formula:

Percentage change       CPI for Year B
  between Year A   =  ------------------ - 1
    and Year B          CPI for Year A

The index is expressed in percents.

Who publishes the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is published in the USA by the U.S. Department of Labor 's Bureau of Labor Statistics on a monthly basis.

How is Consumer Price Index (CPI) used?

The CPI has many important uses in many areas of our daily lives. They include the following:

Economic indicator - The CPI is the most commonly reported measure of consumer prices and how they evolve.

Reference measure - Labor contracts, business agreements, rent deals, and other payment agreements are often indexed to inflation and rely on the CPI.

Deflator for economic series - Data series are often adjusted for comparability. If we want to compare for example Gross Domestic Product (GDP) from 1998 to 2008, we have to adjust it. CPI can serve this purpose as a so called deflator.

Alternative name

The Consumer Price Index (CPI) is also called cost-of-living index.


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