Consumer Price Index - Explained
What is the Consumer Price Index?
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What is the Consumer Price Index?
The Consumer Price Index (CPI) examines the aggregate prices of basket of consumer goods and services in an economy. Basket of goods and services refer to products commonly purchased by individuals and households such as food, gas, clothing, transportation, health care services and others. CPI measures changes of price in these products and services. It measures the cost of living as well as inflation and deflation of prices in an economy. It is a statistical method for detecting the purchase power of people in a country, it also measures divergence of price rates of a collection of goods and services. As used in the United States, the Consumer Price Index (CPI) measures changes in price of a basket of goods and services consumed by households. The United States Bureau of Labor Statistics (BLS) calculates CPI every month and has been doing this since 1913. The Consumer Price Index as reported by BLS measures changes in prices of goods and services and how this affect the cost of living in the United States. Items such as savings and investments are not reported by BLS under CPI, the variation in price for goods and services experienced by non-residents may be excluded.
How CPI is Used?
CPI is used as a statistical measure for identifying periods of inflation or deflation in a country. The Consumer Price Index also indicates the cost of living and the effects of governmental policy on prices of basket of goods and services that people pay for. CPI also reflect variations in prices of goods and services which enable prompt decisions from appropriate agencies. CPI is also essential in determining the purchasing power of individuals. CPI also helps to determine the eligibility of individuals to social security and other government assistance. The BLS also links cost-of-living adjustments of people on Social Security to Consumer Price Index. The Consumer Price Index measures price variation of a basket of consumer goods and services, that is, changes in prices of products and services. Excise taxes that have effect on prices are captured when the BLS gives CPI reports. There are eight items that sum up to a basket of consumer goods and services, these are;
- Foods and beverages
- Education and communications
- Clothing apparel
- Health care
- Other goods and services.
There are specific categories of people that are taken into consideration when calculating or reporting CPI, these include professionals, poor citizens, self-employed and unemployed and retirees. CPI report does not cover the armed forces, inmates, mentally deranged persons, visitors, and rural population.
The Consumer Price Index can be calculated on a single item in the basket of consumer goods and services for a given year. The formula for calculating CPI for a single item is; Cost of Market Basket in Given Year CPI = _______________________________ X 100 Cost of Market Basket in Base Year The BLS records quite a large number of items every month, in order to accurately measure CPI for a given year. BLS records are derived from information gotten from all providers of goods and services that make up the basket. Types of CPI The Consumer Price Index is categorized into two types, they are;
- The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
- The Consumer Price Index for Urban Consumers (CPI-U)
The first type of CPI measures the variation in prices of goods and services of households whose incomes make up more than one-half from wage occupations. CPI-W covers about 28% of the United State's population. BLS focused on this between 1913 and 1977. This type of CPI also show variation in cost of benefits that individuals under social security receive. CPI-U on the other hand covers a wide population, it represents about 88% of the population. Individuals in metropolitan areas, poor people, professionals, retirees, self-employed and employed, urban wage earners and clerical workers are represented.
CPI Regional Data
Aside from doing an overall calculation, BLS calculates the Consumer Price Index based on regions. The four census regions and the major metro areas are reported by BLS. About 80,000 items that are reported by BLS each month are broken into four census regions, the West, South, Northeast and Midwest. Furthermore, CPI reports are also broken down into Los Angeles-Riverside-Orange County, Chicago-Gary-Kenosha, and New York-Northern NJ-Long Island. These are the three major metropolitan areas in the United States. Reports are also made in additional 11 metro areas every other month and 13 metro areas semi-annually.
- Core Inflation
- Cost Push Inflation
- Demand Pull Inflation
- Wage Push Inflation
- Inflation Spiral (Wage-Price Spiral)
- Consumer Price Index
- Buying Power Index
- Breakfast Index
- Capital Goods Price Index
- Farm (Agricultural) Price Index
- Harmonized Index of Consumer Prices
- Repeated Sales Method (Real Estate)
- Pigou Effect
- Hyperinflation (Economics)
- Inflation and Redistribution of Purchasing Power
- Inflation Blurs Price Signals
- Inflation Affects Long-Term Planning
- What are the Benefits of Inflation?
- Cost of Living Allowance
- Adjustable Rate Mortgage